Q1 2022 Lee Enterprises Inc Earnings Call
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Welcome to the Lee Enterprises, 2022, first quarter webcast and conference call. The call is being recorded and will be available for replay beginning later this morning.
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At the close of the planned remarks, there will be an opportunity for questions.
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By webcast may submit written questions through the website and they will be answered during the call as time permits.
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Response later.
A link to the live webcast.
At Investor Day.
Matt.
Now I will turn the call over to your host Josh.
Vice President Finance.
Good morning, Thank you for joining US speaking on this morning's call are Kevin Mowbray, President and Chief Executive Officer, and Tim Millage, Vice President and Chief Financial Officer, and Treasurer also with US on today's call and available for questions Nathan Becky Vice President audience strategy.
Earlier today, we issued a news release with preliminary results for our first fiscal quarter of 2022.
It is available at Lee got net as well as at major financial websites.
It will be walking through an earnings presentation on today's call that can also be found at <unk> dot net.
As a reminder, this morning's discussion will include forward looking statements that are based on our current expectations.
These statements are subject to certain risks trends and uncertainties that could cause actual results to differ materially.
Factors are described in this morning's news release and also in our SEC filings.
During the call we refer to certain non-GAAP financial measures, including adjusted EBITDA and cash costs, which are defined in our news release reconciliations to the relevant GAAP measures are included in tables accompanying the release and now to open the discussion President and Chief Executive Officer, Kevin Mowbray, Kevin will open a conversation.
On slide three of the earnings presentation for those following along.
Thank you Josh good morning, everyone.
I'm pleased you could join us.
Before we dive into the agenda you see on this slide I want to note that this call is focused on our first quarter result growth strategy and outlook.
Won't be commenting on Alden global capital during our prepared remarks or in our Q&A for more information on this we encourage you to review our 2022 definitive proxy statement and related announcements.
On file with the SEC and also available on our 2022 annual meeting section of our Investor Relations website. We appreciate your cooperation.
Yeah.
Our agenda begins with an overview of leaves compelling investment thesis, including the progress we've already made in our digital transformation and a review of our three pillars digital growth strategy.
I'll hand, the call over to Tim to review, our first quarter results and fiscal 2022 guidance.
In retail.
At our core Lee enterprises is a leading provider of digital products and services and high quality trusted local news and information to communities across the country.
Seven out of 10 adults in our markets depend on the local relevant and engaging local news.
Only we provide.
Our platform's reach more than 47 million unique visitors each month across 77 in attractive midsize markets. These strong presence as the trough.
Good source of information and the communities, we serve combined with a cutting edge digital capabilities is the foundation of our digital transformation.
The success of our transformation is reflected in the continued rapid growth of our digital subscriptions and digital only audience revenue.
The fastest growing digital subscription platform and local media.
We achieved an exciting milestone in the first quarter, reaching 450000 digital only subscribers, representing 57% year over year growth and exceeding the halfway mark of our target of securing 900000 digital only subscribers in 2026.
And our amplified digital agency is delivering dramatic growth.
Total advertising and marketing services revenue totaled $43 million in the quarter fueled by a dramatic growth from our amplified digital agency.
Adjusting for one time political revenue digital advertising and marketing services revenue increased 30% year over year.
Total digital revenue increased 17% year over year to 55 million total digital revenue comprised of digital advertising and marketing services revenue, including amplified digital only subscription revenue and digital services revenue is one of several metrics, we are providing to give better transparency.
And clarity on our digital transformation progress.
We're continuing to prove out the strength of our business model and our revenue profile with success in growing subscriptions, which generate a steady base of recurring revenues.
Subscription based revenue to $107 million in the quarter, representing 53% of our total operating revenue.
Yeah.
Under the guidance and oversight of our board of directors.
Our leadership scale continued execution of our growth strategy sets the stage for significant long term value creation, we're very pleased with our results and the progress we're making towards the targets in our three pillar digital growth strategy.
Slide five is an overview of the three pillars digital growth strategy.
Our transformation to a vibrant digitally centric company, we're focused on expanding our digital audience is growing our digital subscription base and revenue and diversify and expanding our offerings for local advertisers.
We expect that continued execution of our strategy will drive more than $435 million and recurring sustainable digital revenue by 2026.
We launched our three pillar strategy in early 2021 as you can see on slide six we made tremendous progress throughout fiscal year 2021.
<unk> industry, leading growth in digital subscribers and digital agency revenue.
For fiscal 2021 total digital revenue grew to 189 million.
As you saw on our results this morning, and as Tim will speak to in more detail is accelerating this momentum.
2022.
Okay.
Execution on our three of our digital growth strategy is at the core of the value, we're creating for shareholders as shown on slide seven.
Sustainable long term revenue growth from our three alerting initiatives will drive margin expansion and stronger free cash flow, which will fuel our continued debt reduction and balance sheet enhancements.
And hence operating cash flow and profit.
Strengthen balance sheet and multiple expansion fueled by increasing recurring high margin digital revenue creates a strong path to significant long term value creation for our shareholders.
With that overview I'll dive a bit deeper into the initiatives supporting each of the three pillars of our digital growth strategy.
Our strategy Leverages leaves key strengths, our local market expertise, our industry, leading digital revenue growth and our commitment to the highest quality means to build a larger recurring revenue base and generate long term top line growth.
This growth expected to achieve $435 million of digital revenue in 2026 is driven by increased digital subscriptions from initiatives in pillar, one and two and increased digital advertising revenue on pillar three.
Yeah.
Slide 10 offers and ended up work at pillar, one focused on expanding digital audiences.
With investments in user experience multimedia presentation format and rich high value content.
We're driving higher engagement outsized traffic and monetization.
As noted in our press release video revenue was up 98% in the quarter.
This is off a modest base. It is indicative of the attractive opportunities, we have leveraging our trusted brands and strong market positions and in house capabilities.
We continue to make value added investments to drive additional growth.
As important as it aims to increase digital audiences, thereby increasing the addressable market for digital subscribers.
So this is the expansion of our base of digital only subscription and revenue by converting more of our vast addressable market to subscribers.
Yeah.
We're leveraging cutting edge of data and technology and expanded offerings for paid each content on topics, where we have expertise and unique selling positions. These.
These tactics are driving an increase in total subscribers and position us to achieve our goal of reaching 900000 digital only subscribers by the end of 2026 and as I mentioned earlier he is already more than at the halfway mark of this target.
At the end of the first quarter of 'twenty to 2022, we had 450000 digitally only subscribers and 57% increase year over year, reaching.
Reaching 900000 digital only subscribers and increasing our average digital subscription rates are important goals and leaves digital transformation and it increases the base of our subscription based digital revenue.
We expect to reach an inflection point next year, when our digital only audience will overtake print subscriptions and make up the majority of our subscriptions overall.
As shown on slide 12, growing digital subscribers requires both expanding our addressable market and strengthening our visitor to subscriber conversion rates.
In addition to offering more attractive niche subscription that appeal to targeted audience. We're also deploying advanced email and social media strategies using our extensive first party data and technology developed by town news, our SaaS content platform.
These efforts are focused on a huge attractive addressable market today, we have 47 million unique visitors each month 12 million loyal readers with more than two visits per month, and $2 4 million highly engaged readers with far more visits each month. Our goal is to turn these readers each a base of 900000 digital subscribers.
Generating strong recurring revenues and as I mentioned, we're more than halfway there.
We're converting readers into digital subscribers faster than our peers as you can see on slide 32 lease digital subscription growth far outpaces getting at in the New York Times for 12 quarters running this demonstrates our strong track record of high level execution and cut.
The talent and technology investments, we believe will continue to be an industry leader.
Yes.
Our continued momentum makes us confident in our ability to reach 900000 digital subscribers in 2026, because it only requires converting a modest portion of our total addressable market.
Importantly, while we predict the birth and steady climb in digital subscribers, we expect to deliver even faster revenue growth over the period grew a modest increase in our Peru.
As we execute our pillar two plans, including targeted offers premium pricing for niche products using data and analytics and maximizing pricing actions. We believe Lee is a clear path to grow our digital only recurring sustainable subscription revenue to $100 million in 2026.
Representing a 29% combined average growth rate.
To sum up on slide 15, he has already established a record of accelerating digital subscription growth.
With planned incremental investments in talent and technology. We are on track to reach our goal of 900000 paid digital only subscribers in 2026.
The execution of that strategy is expected to generate recurring sustainable digital subscription revenue exceeding $100 million.
Yeah.
Turning to slide 16, our third pillar focuses on diversifying and expanding our offerings for advertisers and we're doing that in two ways.
First you amplified our full service Omnichannel digital marketing agency that provides local advertisers with sophisticated custom solutions, including consulting media buying and analytics.
Second by maximizing our own and operated revenue opportunities on these digital platforms.
Our owned and operated properties attract massive audiences, who are offering more video inventory and branded content to boost our digital ad revenue.
Both of these initiatives are supported by these vision platform vision is the proprietary sales enablement tool powered by amplified digital as seen with our strategic partnership with mud advertising, a leading full service automotive advertising agency. We've licensed lead innovative vision platform to enable its partners to fully support.
<unk> Cross channel marketing efforts.
Industry wide omnichannel advertising for local advertisers and is expected to continue its double digit growth in the next two years.
<unk> platform allows us to capture the significant growth in this category and the vision platform is absolutely transform local advertising for the enterprises.
As you can see on slide 17, our anti digital agency revenues are growing rapidly.
With advanced data driven AD tech specialized category expertise scalable customer content video and powerful first party data access amplified as a strong partner for local and regional businesses looking to drive growth there.
Continuing to expand appetites capabilities, including building, a new ecommerce solutions to offer our AD partners.
And our first quarter <unk> revenue grew 69% year over year.
Continue to see significant growth runway as we execute our strategy, we're projecting $65 million in outside revenue in fiscal year 2022 to reach our target of $100 million and amplified revenues by 2024.
Empathize dramatic growth trajectory is fueling our five year digital advertising outlook, we expect to reach $310 million of annual digital advertising revenue in 2020 sets of which about 200 million will come from animal side.
Summing up our advertising strategy on slide 19, amplified as a major growth engine for our digital advertising transformation.
Our vision platform uniquely positions us to capitalize on the double digit growth and Omnichannel digital advertising.
Spec to generate recurring sustainable digital revenue exceeding $310 million in 2026.
And now I'll turn it over to Kim to discuss our first quarter financial performance.
Thank you Kevin I'm now moving to slide 20.
We're very pleased with our results and the progress we continue to make on our three pillars digital growth strategy.
At a high level, we finished the quarter with solid revenues, especially strong in our digital growth categories and continue to control costs in our legacy print business.
We also continued to make targeted investments in our platform to fuel our digital transformation.
This performance has us on track to achieve our full year targets for digital revenue and adjusted EBITDA.
Moving to our first quarter financial highlights and outlook.
Total operating revenue was $202 million in the first quarter.
Digital revenue increased 17% in the first quarter to $55 million, excluding political advertising, which generated high revenue. During the 2020 campaign season total digital revenue increased 25% in the quarter.
Total digital revenue was driven by the rapid growth of amplify and growth in digital only subscription revenue.
Digital only subscription revenue increased 26% and totaled $8 million.
We now have over 450000 paid digital only subscribers up 57% in the quarter, which represents half of our long term target of 900000 digital only subscribers.
Digital advertising and marketing services revenue increased 19% in the quarter to 43 million.
Smoothing the digital political revenue.
Digital advertising and marketing services revenue increased 30%.
Digital marketing services revenue of amplified fueled the growth with revenue up 69% totaling $15 million in a quarter and $47 million over the last 12 months.
Total print revenue was $147 million in the first quarter, an 11% decline compared to the same quarter a year ago due to continued secular declines in supply chain constraints affecting the demand for national advertising.
Operating expenses totaled totaled 179 million and cash costs were up two 5%.
Increases in cash costs were attributed to strategic investments in digital talent and technology tied to our digital growth strategy and increased digital cost of goods sold.
As we cycled onetime benefits received in the prior year principally medical.
We continued our business transformation efforts have reduced the legacy print costs, partially offsetting the increases.
Net income totaled $13 2 million and adjusted EBITDA totaled $26 1 million.
As for our fiscal 'twenty two outlook, we expect to deliver continued digital growth from the execution of our strategy.
We expect to achieve 495000 digital only subscribers.
$33 million in digital only subscription revenue.
Wondered $75 million in digital advertising and marketing services revenue.
$230 million in total digital revenue and.
And adjusted EBITDA in the range of 95 to 98 million.
Yeah.
Moving to slide 22.
We have a long history of responsibly, managing our cost structure and we have continued to capture efficiencies across our business since the acquisition of BH media.
In addition to the significant synergies achieved since closing we remain focused on leveraging our larger platform to share resources centralized certain operations and reduce our overall cost structure.
We have a current base of more than $300 million of direct costs associated with our legacy revenue streams.
Sustainable cost management, we expect to achieve 20% to $30 million reduction in legacy costs in fiscal 'twenty, two compared to the prior year.
While we remain focused on maximizing our efficiencies and reducing the cost structure of our legacy print business and growing profits and main priority is to drive long term sustainable digital revenue growth.
As a result, we are making targeted investments that will drive our digital future and will impact cash flow.
We expect the investment, we're making in new talent and technology and the increased digital cost of goods sold.
The increased cash cost by approximately 36 million.
Slide 23 described those targeted investments in more detail.
Transforming these model from a legacy print centric business to a vibrant digitally centric business requires significant investment in talent and technology.
For example on the talent side, we are focused on bringing on team members with AIA expertise as we lean into more data driven product that amplified.
Executive producers to curate more accustomed video content that grew 98% year over year and user experience expert because we continue to transform the presentation of local news.
In systems and infrastructure, our planned investments in feed data Lake technology to more efficiently store, our growing pool of first party data as well as data visualization tools to enable our newsrooms and our operators to analyze that data and drive enhanced reader engagement.
We anticipate around $15 million of incremental investments in fiscal year 2022.
Moving to slide 24, we continue to strengthen our balance sheet the.
The principal amount of debt at the end of the first quarter was $463 million down 20 million sequentially.
This is down $113 million or 20% since our March 2020 refinancing.
As a reminder, our credit agreement with Berkshire Hathaway, our sole lender has favorable terms that are incredibly important for us as we execute our strategy as it allows us to make the necessary investments in talent and technologies that fuel our recurring sustainable revenue growth.
We made no pension contributions in the first quarter and we do not expect any pension contributions in fiscal year 2022.
Finally, we continue to identify opportunities to monetize our real estate, which facilitate accelerated debt repayment.
We generated $25 million of proceeds in 2021 and are targeting an additional $20 million to $30 million in asset sales in fiscal 2022 with $14 million already closed in the first quarter.
As a reminder, our goal is to achieve our long term leverage target of under two five times by the end of 'twenty six.
Next I'll take a moment to outline the five year outlook and the rationale for our new financial metrics.
As Kevin mentioned at the top of the call, we are providing metrics to give better transparency and clarity on our digital transformation progress.
Total digital revenue is defined as digital advertising and marketing services revenue, including amplified.
Digital only subscription revenue and digital services revenue.
Previously other digital subscription revenue was included in all periods in this presentation have been restated for this reclassification.
This table summarizes our fiscal 'twenty two outlook and beyond as you can see we expect to make significant continued progress on our digital transformation over the next several years.
And with that I will turn it back over to Kevin to wrap up.
Thanks, Tim to wrap up I'd like to thank the entire lead team for their efforts in driving our transformation. We have the right board right team and the right strategy and I believe we are better positioned than ever to create long term value for our readers to users advertisers and shareholders. This concludes our remarks the team will remain on the line.
For questions you may have operator, please open the line for questions.
At this time, we will be.
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Your line is open.
Thank you, it's always nice when a company beat expectations. So that's great congratulations.
A couple of questions can you remind me again, what the digital political advertising number was in the year prior quarter.
Yeah. Thanks, Mike I appreciate the comments, yeah, we had around $3 million of political revenue in the prior year.
That.
It was associated with various campaigns across all of our markets.
Oh, great and can you tell me when do you cycle against the changes in the paywall with your digital sites.
When we cycle against that.
Yeah, most of those changes will cycle in the middle of FY 'twenty, two we get them fairly late in the fiscal year 'twenty one.
Gotcha, and then on terms of amplify you know obviously very strong growth. There can you discuss the tone of the current market.
And maybe also discuss that on the print advertising side. If you can just kind of curious to see how if there were any impacts with the army card barrier issues with how the pace of the recovery looks for us in terms of both on the digital side and whether or not we're starting to see more moderation on the print side.
Can you just kind of give us a.
Colorado current advertising environment.
Sure I'll start this is Kevin.
I'd give you an answer in a couple of bites I would say the recovery as it relates to regional and local advertisers is really strong and I think that's a clear based on the really strong growth. We saw in Q1 up 69% of the anti digital recoveries a little bit slower.
<unk> the supply chain issues with key accounts, you know, they're not getting products on the shelf that's.
On slide target Kohl's and others.
An impact there.
And does that also affect the auto category I'm, just curious because I understand that.
Cars are selling pretty well in that they haven't been advertising is strongly I was just curious how important of a category that is that now still for you and if you could just talk a little bit about that category in particular.
Sure.
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We have a as I mentioned in our remarks, we've got a really great relationship with not advertising, which allows us to.
Participate in the share of revenue based on our vision platform. So we feel good about that but you're right car sales have been.
And then selling briskly, particularly.
Used cars and as a result, we do see revenues down in that category I would point out though that category is.
The largest category classified Israeli audits that are much larger and larger in terms of the Ah <unk>.
Revenue segment.
Yeah, and then just to clarify you mentioned about the $14 billion and closed our real estate sales in the quarter just to clarify the $20 million to $30 million and for fiscal 2022 that did not include the part that was inclusive of a 2000 14 billion correct.
That's correct. That's correct, that's a fiscal year 'twenty two guidance of $20 million to $30 million in closed sales with $14 million were closed in the first quarter.
Gotcha, and I think Thats all I have for now thank you so much I'll, let others ask questions. Thank you.
Great. Thanks, Mike we will.
I'll turn it over to webcast questions.
Our first question from the webcast is you've had another great quarter with digital sub growth of 48000, but our full year guidance only requires averaging 15000 per quarter to achieve is that because the target is conservative or because you're expecting a slowdown.
What I would say is our target as you go.
Hitting 900000 digital only subscribers.
It is our targets our long term targeted getting there is not going to be a perfectly linear line.
Line from where we are here to give a 900000 and the reason for that is we're trying to grow both our units as well as growing our rates.
We think we have the opportunity to look at a market specific factors are in.
And in some quarters, we will outperform on the rate at some quarters, we will outperform on the bottom.
Okay.
Question, there appears to be a lot of embedded value than we what are your thoughts on selling or spinning off amplified our town news.
Yeah, I think amplified and town news or both are really important.
Factors and our digital growth strategy amplify that he spent a lot of time talking about this morning is one of the major growth engines of our digital advertising and reaching the targets that we have there.
Right now 47 million of LTM revenue with a relatively small base, but we do expect it to expand and grow in the future in town news, which remains a key priority for me as it helps helps us develop the tactics and strategies and technologies.
Allergy to execute on our keeping our digital digital growth strategy. So I would say that the better value is to leverage the digital businesses to execute on our three pillars of growth strategy.
Okay. Next question is a warrants issued in 2014 are due to expire at the end of March of this year have any been redeemed in XL how many.
That's a it's a good question and as a reminder, we do have.
Warrants that were issued in 2014 associated with a debt refinancing.
That allow us for issuing up to 600000 shares of restock the exercised price of the warrants was $41.90.
None have been exercised as of now but as.
You rightly pointed out.
The expire March 31 2022.
We have no more questions from our web participants so I'll turn the call back to Kevin for closing remarks.
Your interest in Lee and thank you for joining the call today.
Thank you, ladies and gentlemen at this time.
Our next question.
Great. Thank you all for your participation.
Yeah.
Okay.
Yeah.
Okay.