Q2 2022 Gannett Co Inc Earnings Call
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Greetings and welcome to <unk> <unk> earnings Conference call.
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A question and answer session will follow the formal presentation.
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It is now my pleasure to introduce your host Matt Esposito of Investor Relations.
Thank you and over to you Sir.
Thank you.
Good morning, everyone and thank you for joining our call today to discuss <unk> second quarter 2020 to resolve.
Presenting on today's call will be Mike Reed chair.
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 to the Gannett website, you will find that we have posted an earnings supplement in addition to our earlier press release we.
We will be referencing it today on the call as it provides you with additional detail on this quarter's performance.
Before we begin.
Let me remind you that this call is being recorded.
In addition, certain statements made during this call are or may be deemed to be forward looking statements, including those with respect to future results and events and are based upon current expectations.
These statements involve risks and uncertainties that may cause actual results and events to differ materially from those discussed today.
We encourage you to read the cautionary statement regarding forward looking statements in the earnings supplement as well as the risk factors described in Gannett's filings made with the SEC.
Except as required by law, we undertake no obligation to publicly update or correct any of the forward looking statements made during this call.
In addition, we will be discussing non-GAAP financial information during the call, including same store revenues.
Free cash flow adjusted EBITDA and adjusted net income attributable to <unk> you can find reconciliations of our non-GAAP measures to the most comparable U S. GAAP measures in the earnings supplement.
Lastly, I would like to remind you that nothing on this call constitutes an offer to sell or solicitation of an offer to purchase any interest in Gannett the webcast and audiocast are copyrighted material of Gannett.
It may not be duplicated reproduced or rebroadcast without prior written consent.
With that I would like to turn the call over to Mike Reed Gannett's, Chairman and CEO .
Thanks, Matt Good morning, everyone. Thanks for joining our call. This morning.
Like many companies across many industries, we experienced a very challenging second quarter, resulting from the difficult economic environment and rising pressures on the consumer.
On the topline weakening consumer demand led to larger than expected declines in print subscription revenues effectively pulling forward expected print revenue losses from future years in.
In addition, the digital advertising market came under pressure during the quarter.
From a cost perspective, the tight labor market affected our ability to keep circulation route staff as well as increased the cost of labor as we hired digitally savvy talent for our digital transformation.
In addition, newsprint transportation and energy costs also rose.
Impacting both our Q2 results.
Our revised guidance for the full year takes into account all of these things and our expectations for the back half of the year.
However, there were some meaningful accomplishments in the second quarter that are clear indicators of the continued progress on our long term growth initiatives.
Our digital subscription business continued to grow at a strong pace.
<unk>, both new paid subscribers and increased revenue and we saw a slight increase in our pea.
In addition, our digital marketing services business continued to perform well, we realized strong revenue and customer growth increased our pool and achieved strong adjusted EBITDA in that business.
The structural reorganization, we announced in early June is also driving positive momentum for our company.
By removing internal friction points and aligning talent expertise with the right parts of our business.
We believe we are now more effective in both navigating near term challenges and driving our long term growth strategies.
Given that we do not expect the near term pressures to abate in the second half of 'twenty 'twenty. Two we have moved quickly to implement a significant cost reduction program.
Beyond taking significant and permanent cost out of the organization.
Primarily on the print side of our business.
We are focused on transformative cost reductions that create a more variable cost structure going forward.
This transformation of the cost base is expected to involved in it involve an increased reliance on automation and third party resource providers.
We are also working on steps expected to improve our revenue performance attacking things that have hindered performance in the past and of course, we are continuing to keep the highest priority and focus on our digital growth businesses and our long term strategy.
Further we remain committed to debt repayment and as you'll hear today.
Through identifying additional non strategic and real estate assets to bring to market. We believe we will repay debt by 150 to 200 million within the year 2022, very close to our target at the beginning of the year.
So to quickly summarize before turning to the detail of our business unit results.
We have a very seasoned management team.
Who have navigated choppy waters in the past.
We are taking aggressive steps to manage our business in the near term.
Keeping our focus on driving our long term digital growth.
We believe our strategy is right.
The pain, we have now is pulling forward future losses, which will make us stronger as we move forward with a lower and more variable cost structure.
We are bringing additional assets to market for debt repayment and our balance sheet is sound.
Now, let's turn to the second quarter results by business.
Two key categories for our long term growth and transformation are our content platform, which is driving paid digital subscriber in audience growth and our digital marketing solutions platform, which is driving a SaaS like b to b business with highly recurring revenue streams we.
To make meaningful progress in these in each of these two areas, which is very encouraging.
We ended the quarter with 1.87 million digital paid subscriptions growing 35% year over year.
Quarter over quarter, we added 115000, net new paid digital subscribers.
We expect to see continued momentum and engagement in this segment as we further utilize newsroom analytics to fine tune and amplify our premium content.
Optimizing our subscriber funnel efficiency.
Scale, our new subscription products some of which include our crossword product our gaming platform our USA today.
And our sports vertical.
In addition building and launching new subscriber partnerships.
And applying data science to improve retention and minimize churn.
All of these efforts are underway and we are excited and optimistic to see the positive impact on growth that they have.
We also experienced significant growth during the second quarter and our total registered users and newsletter subscribers.
We ended the quarter with 4.9 million registered users.
An 8.5 million newsletter subscribers.
Which represents meaningful growth of 37% and 44% respectively year over year.
Both continue to be important consumer acquisition and subscriber engagement channels for us.
And moving forward our goal would be to build on those relationships activate those users and convert a portion of this highly engaged pool of consumers into paid subscribers.
Our digital marketing solutions business achieved record core platform revenues of 116 million in the second quarter up.
Up 11% year over year.
And we maintained double digit adjusted EBITDA margins.
Our core customer count increased to its highest level since our our new platform and product alignment in the fourth quarter of 2020.
Over 60% of our revenue in the digital marketing solutions segment.
Is recurring and structured an evergreen content contracts with customer budget retention rates of approximately 95% I think that's a key point here that I really want everybody to take away over 60% of our revenue in the digital marketing solutions segment is coming from recurring.
Structured evergreen contracts.
We continue to expand our D M S private offerings through our freemium experience ending the quarter with approximately 7000 registered users.
Registered users has quickly grown to over 9000 as of today, So basically through the month of July .
These freemium registered customers are in addition to our over 16000 core platform customers.
Our freemium clusters customer segment is important for future growth. As these are businesses that have registered and are engaged with our platform and some of our products.
We believe this channel will convert to paid customers at a higher rate than many of our other marketing channels.
Turning to our events business, which we brand USA today network ventures.
We experienced strong revenue growth in the second quarter, 34% year over year, driven by a return to in person events and endurance races.
Throughout the quarter did that hosted 94000 attendees across 58 in person events.
<unk> to 'twenty 2000 attendees and 18 in person events in the same quarter of 2021.
One example of this was our inaugural Masters Legends Party, which featured appearances by Davis loved the third and cold most.
This past week, we hosted USA today National High School Sports Awards, which is the country's largest high school sports recognition program.
Our hosts where Rob Gronkowski and Vernon Davis.
Stellar athletes and twenty-nine sports were recognized resulting in player of the year announcements within each sport.
Now the impact of macroeconomic conditions was felt most acutely in our legacy print business.
Both print advertising and print circulation experienced greater than expected losses.
With home delivery revenue being the most severely impacted.
Our in home distribution continues to be challenged by labor shortages.
And we have seen a 67% increase year over year and the percentage of Unstaffed delivery routes.
Further a 267% increase in unstaffed delivery routes when compared to 2020.
Couple that with increasing consumer weakness and we saw accelerated print circulation losses more than we anticipated.
And we clearly see that household budgets have tightened from.
From gas at the pump to groceries to many other things and we have heard this feedback directly from our loyal print subscribers.
However, we are making changes to improve the subscriber experience those things are underway and we believe over time. The changes we are making will moderate those declines.
Our digital subscriber and digital marketing solutions businesses continue to experience strong growth despite the tightening economy.
So while different operating and economic environments will be encountered from time to time, we remain focused on and believe in our long term strategy of being a technology enabled platform company with data and product driving our digital consumer subscription business and our subscription like beat it.
The digital marketing solutions business.
As I mentioned previously we have an experienced management team that has persevered through previous economic downturns.
Our recent organizational restructuring allows us to have a more distinct focus for our media and Dms businesses.
And we believe provides us a better operating platform from which we can drive our business and achieve our goals.
This reorganization announced June 1st centralized the operations of our two distinct U S business units did that media and digital marketing solutions.
This structure was designed to align with our long term strategic pillars and to provide us with greater internal efficiency and execution around our key operating pillars.
Specifically the gang that media business unit, which we're calling media.
<unk> focuses on news content operations, such as print and distribution business to business marketing solutions and subscription growth through a digital first lens.
Mirabel Perez Wadsworth, who was most recently the president of news for Gannett and publisher of USA today, and the USA today network is now leading the media business unit.
Mirabel is uniquely qualified for this role and she has been an instrumental member of <unk> Senior management team and her business and industry experience includes running Gannett's News division overseeing more than 4000 journalists across more than 200 local news organizations.
And the flagship public flagship publication USA today, but additionally, previously serving as chief strategy and transformation officer.
The second business unit created under the restructuring is digital marketing solutions.
Which helps brands and businesses attract retain customers.
And includes our local IQ digital marketing platform.
Kris Barton, formerly Gannett's Chief product Officer now serves as president of this unit.
And overseas operations that support marketing solutions, including customer services product and engineering.
Christmas expertise make him well equipped to drive the next phase of innovation for this business.
That's good that's chief product officer since 2017, Barton has led product development for consumer and marketing products.
Sleep you, let a global team as rich Loeffel reach locals chief product officer, overseeing product and technology, receiving dozens of industry awards, including Google and Microsoft Innovation honors.
This improved operating structure for getting that.
And the reorganization is consistent with our long term transformation to further drive the speed and urgency of our evolution to a customer first subscription led business powered by data and technology.
I am grateful for the experience commitment and dedication of the management team and I'm confident in our ability to overcome the disruptions we are facing today to deliver on our long term strategy.
Changing gears a bit.
During July we restructured our sports gaming deal with typical as their expansion has been slower than anticipated and they still operate and only two states.
The newly structured four year agreement with typical enables us to now enables us to work with other parties across the country in different geographies.
While still providing getting at with qualified betting referral fees from typical.
The new agreement included a buyout of our warrants to purchase equity in typical.
We are already off and exploring opportunities with other sports gaming providers and expect to see increased revenue from this category moving forward.
Before closing it's personally important to me that I highlight our trusted and impactful journalism.
Our local and national journalism is more important than ever given the polarization in our country.
It has never been more evident than in the past 45 days when USA today and our local property network published two very important pieces.
One was the release of video footage by the Austin American statesman of the tragic mass shooting and you've already.
Along with the Austin American statements Statesman's translation to Spanish of the Texas House Committee Investigative report released as a public service to the community many who are native Spanish speakers.
The second story was the collaboration between the Columbus Dispatch and the Internet Indianapolis Star in the wake of the Dobbs decision about a 10 year old victim, who traveled from Ohio to Indiana for an abortion.
Our Columbus Dispatch reporter Bethany Bruner was the sole journalist in the courtroom confer.
Confirming the details of the horrific case that many believed was a fabrication.
These stories reinforced the importance of local journalism and its impact.
We drive accountability, we drive transparency and importantly, we drive change.
We are committed to seeking and reporting the truth and the communities we serve across the country.
No.
I'd like to hand, the call off to Doug for more perspective on Q2, and the full year Doug.
Thank you, Mike and good morning, everybody as Mike mentioned, our top line was negatively impacted in the second quarter as a result of a slowdown in digital advertising spend and increased price sensitivity from our print subscribers and to a lesser and lesser extent unfavorable foreign currency impacts.
For Q2 total operating revenues were $748 $7 million, a decrease of six 9% as compared to the prior year quarter on a same store basis operating revenues decreased six 3% year over year as compared to down two 5% year over year in the first quarter.
Same store revenue trends in our digital marketing solution segment held steady from Q1 growing eight 2% year over year, but the media segment faced increasing headwinds in digital media and in our traditional print businesses.
Given the strengthening of the dollar relative to the U K pound currency translation negatively impacted our reported revenue by $7 $6 million or about 95 basis points as compared to the prior year.
Despite the challenging environment total digital revenues continued to grow compared to the prior year on a same store basis up one 5% year over year in Q2.
Total digital revenues were $261.8 million in Q2, and now account for 35% of total revenue.
Adjusted EBITDA totaled $59 million in the quarter down 56, 1% year over year.
Adjusted EBITDA margin was six 8% versus the 14.4% recorded in the prior year quarter.
The decline in adjusted EBITDA year over year was caused by the unfavorable macroeconomic landscape along with the secular pressures of our print revenue.
Which were accelerated by distribution shortages and greater price sensitivity in our print customer base.
Expenses included in adjusted EBITDA were $697 $8 million, which increased one 4% year over year, reflecting approximately $15 million from acquisitions made in our newest quest entity.
And the ongoing inflationary pressures.
Specifically the inflationary impact resulted in an estimated $23 million year over year and an increase in costs tied to distribution newsprint fuel utilities event security and materials, the vast majority of which impacted the media segment.
When combined with the impact we saw in Q1, it translates to a year to date negative impact of approximately $44 million as a result of these factors.
On the bottom line, we ended the second quarter with a net loss of $53 $7 million and $26 $9 million of adjusted net loss attributable to Gannett.
Our net loss includes $49 $5 million of depreciation and amortization and was negatively impacted by increasing integration and reorganization costs tied to head count reductions as well as the cumulative impact and our tax provision of the limited deductibility of our interest expense.
In Q2, our interest expense was approximately $26 $1 million, which is down 26% from the prior year.
Moving now to our segments.
The media segment revenue in the second quarter was $664 $8 million, a decrease of eight 2% as compared to the prior year and down seven 7% on a same store basis.
This compares to down two 9% in the first quarter.
The media segment experienced accelerating declines in print advertising decreasing 11, 3% year over year on a same store basis.
Digital advertising and marketing services revenues decreased eight 9% on a same store basis, primarily driven by softness in digital media, which decreased 17, 8% on a same store basis.
The decline in digital media reflects a softer programmatic advertising market, which resulted in declines in our national digital advertising.
Also as a result of policy changes in the broader advertising ecosystem.
We experienced challenges in monetizing third party third party affiliate inventory as compared to the prior year period.
Year over year, our sports media group's digital advertising declined $11 $3 million during the second quarter.
That said, we continue to see growth in digital marketing services, and digital classified which increased five 1% and 29% respectively on a same store basis.
The digital marketing services revenue in the media segment was $35 $1 million in the second quarter, we saw core client count increased seven 5% over the prior year quarter as a result of impressive performance and productivity from the local media sales channel.
Moving now to circulation.
Circulation revenues decreased 11, 7% compared to the prior year on a same store basis, primarily caused by impacts of our home delivery and single copy sales over.
Over the last several months, we've seen increasing sensitivity to pricing primarily with our home delivery subscribers. This is exacerbated by the delivery challenges, we're facing as well as we struggled to maintain appropriate coverage of delivery routes from an employee and third party contractor basis, both of which are tied to labor shortages.
While print circulation, which declined 15, 8% year over year on a same store basis remains under pressure from industry wide headwinds, our digital only circulation revenue of $32 $5 million grew 36, 7% compared to the prior year on a same store basis.
Although digital only ARP, who experienced declines year over year, we witnessed sequential growth of approximately 8%, which represents the second consecutive quarter of positive <unk> growth.
Adjusted EBITDA for the media segment totaled $59 million, representing a margin of seven 6% in the second quarter.
Similar to Q1, the second quarter margin reflects cost pressures, we are experiencing in a number of key categories, including postage contract labor as well as higher newsprint prices, which rose 31% in the second quarter as compared with the prior year and that is on top of investments made across content and data and marketing.
Year over year to support our key growth pillars.
We did not see the same revenue headwinds in our digital marketing solution segment, and we were very pleased with the progress in the second quarter for.
For the digital marketing solutions segment total revenue in the quarter was $118 million, an increase of eight 2% year over year on a same store basis.
Looking at core customers, which are those customers that utilize our proprietary digital marketing services platform. There was an increase from 15400 customers in Q1 to 16200 customers in Q2.
And that's the highest number of active customers on the platform to date.
The Dms segment does still experience some seasonality with the second quarter are historically stronger period.
Compared to the prior year quarter, the core platform revenue, which accounts for over 97% of the revenue in the digital marketing solutions segment increased 11, 2% year over year.
Average monthly customer count increased by 940 <unk>.
Year over year and represents a six 2% increase arps.
<unk> grew four 8% versus the prior year and reflects a sharpened focus on the product portfolio as well as steady growth from our local media sales channel.
Adjusted EBITDA for the digital marketing solutions segment totaled $14 $3 million, representing a strong double digit margin of 12, 1% in the second quarter.
Let's now turn to the balance sheet.
Our cash balance was $87 $3 million at the end of Q2, resulting in net debt of approximately $1.26 billion.
Capital expenditures totaled approximately $12 $5 million during Q2, reflecting investments related to digital products technology transformation and operating infrastructure.
Free cash flow in the second quarter was a use of cash of $43 $3 million, which was negatively impacted by $34 $1 million of interest payments, which included the first interest payment on the 20th 26 senior notes, which is payable every six months on an ongoing basis.
We ended the quarter with approximately 1.3 or $4 billion of total debt and our first lien net leverage was 2.31 times, which reflected $26 $9 million of total debt pay down during the quarter as a result of $11 $8 million of asset sales and $15 1 million.
A scheduled amortization on our senior secured term loan.
During the quarter, we completed nine real estate sales totaling $6 $4 million and completed six asset dispositions totaling $2 4 million.
We continue to project $60 million to $70 million in total asset sales for the year. However, as you heard Mike say, we are exploring the sale of a broader portfolio of real estate in an effort to increase the amount of asset dispositions for the remainder of the year and to further pay down the debt.
In the second quarter, we repurchased 800000 shares of common stock for $3 $1 million under our share repurchase program.
Our level of share repurchases during the quarter was governed by maintaining a healthy level of liquidity in the face of uncertainty created by the overall macroeconomic environment.
We firmly believe that being disciplined with our capital deployment strategy is the correct action in today's complex operating environment.
We continue to have significant cash on hand, and still have opportunities to make meaningful real estate and other asset dispositions, which will further assist us in paying down debt.
As we look forward, we are mindful of the elevated uncertainty in the economy, but we are confident that we are prepared and well positioned for a broad range of outcomes.
Turning now to guidance.
As Mike mentioned earlier, we are not satisfied with our results in Q2, and we are taking swift actions that we believe will allow us to adjust our cost base and level of investments in our growth pillars moving forward.
We expect that these actions will benefit the second half of the year, but they will be naturally weighted more towards Q4.
Our cost transformation is not temporary in nature and so we anticipate benefit from these actions into 'twenty, two 'twenty three and beyond.
Based on current trends and the actions that we're taking to actively mitigate those impacts we are estimating that our full year adjusted EBITDA will be in the range of $270 million to $300 million.
We are also now forecasting free cash flow to be in the range of flat to positive $20 million for the year as a result of the reduction in operating performance significantly higher severance and restructuring associated with our cost actions as well as increased interest costs.
This outlook reflects an assumption that same store revenue trends will be down 6% to 7% for the annual period.
Overall, the primary drivers of the change in outlook, our reduced expectations in the topline and our net media business unit and specifically the legacy print business and digital media monetization as well as continued inflationary pressures.
Despite these reduced expectations for 2022, we believe that our continued focus on driving growth in our digital businesses and specifically, our digital only circulation and our dms business as well as aggressively reducing our cost base will enable us to navigate and exit this period of uncertainty with long term value crew.
<unk> for our shareholders.
Our quarterly earnings supplement posted to our website at investors stuck in net dot com provides additional information regarding our forward looking guidance and includes reconciliations of non-GAAP measures to the most comparable U S GAAP measures.
I will now hand, it back over to the operator for questions and then we will go to Mike for some closing comments.
Operator.
Thank you very much that.
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Thank you ladies and gentlemen, we have reached to the end of the question and answer session and I'd like to turn to call back to get at sea.
Oh, Mike Reed for closing remarks over to you Sir.
Thank you. This is my this is my tremendous honor to lead Gannett staying true to our culture values and strategy has enabled us to successfully navigate through various economic environments in the past and I know the spirit of collaboration will propel us forward as we navigate the complicated.
The environment ahead, we.
We are making the difficult choices to align our teams and our resources.
To further solidify Gannett and our commitment to our mission and our strategy.
We recognize the coming months will be challenging, but these macroeconomic headwinds demand we act with urgency and they will pass.
We believe our subscription led business model robust balance sheet and experienced management team puts us in a solid position to weather this downturn and deliver value to our shareholders.
Most importantly, the significant progress that we have already achieved on a long term digital growth strategy demonstrates the traction we have gained validates the premise of our plan and represents just the beginning of the value we expect to capture over the time over time.
I continue to be optimistic.
And robust and feel we have a robust opportunity in front of us.
We appreciate your interest in <unk> and we look forward to updating you on our progress on our next earnings call. Thank you all for joining today.
Thank you very much ladies and gentlemen, this concludes today's conference.
You may disconnect your lines at this time, thank you for your thoughts.
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