Q3 2022 Lee Enterprises Inc Earnings Call

Welcome to the Lee enterprise 20 and 20 two third quarter webcast and conference call. The call is being recorded and will be available for replay beginning later this morning at investors Dot Lee Dot net.

At the close of the planned remarks, there will be an opportunity for questions.

partestans accessing this call by webcast may submit written questions through the website and they will be answered during the call, as time permit.

Otherwise you will received the response later.

A link to this live webcast can be found at investors dotlee Dot net.

Now'll turn the call over to your host, misterr George rehinho. Vice President. Finance go head. Thank you.

Good morning and thank you for joining us speaking down this morning's call for Kevin mol Ray, President and Chief Executive Officer, and Tim millage, Vice President, Chief Financial Officer and Treasurer.

Also with that on today's call and available for questions is Nathan becky, Vice President, audience strategy.

Earlier today, we issued a news release with preliminary results for our third fiscal quarter of 2020 -two.

It is available at let net, as well as the major financial website.

Please also refer to our earnings presentation. Found investors that weed donet. That include supplemental information.

As a reminder, this morning's discussion will include forward-looking statements based on our current expectations.

These statements are subject to certain risks, trends and uncertainties that could cause actual results to differ materially.

Such 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.

Reconciliation to the relevant GAAP measures are included in table accompanying the release.

And now I open the discussion as our President and Chief Executive Officer, Kevin MO.

evvan will open the conversation on Slide three of the earnings presentations, for those following along.

Thank you, Josh. Good morning everyone, and I'm pleased you you could join us. I'm really encouraged at the pace by which or a transformingly into a vibrant, digitally-centric company. Our third quarter results clearly demonstrate we have the right strategy, the right team and we're moving with velocity towards Le digital transformation.

With our third quarter results, we have exceed many of our digital revenue metrics a full quarter early and we're on track to achieve our full year adjusted EBITDA guidance of 95 ill to ninety-eight million.

In the third quarter we reported 49% growth in digital subscribers, FIF percent growth in digital subscription revenue and 74% growth in amphi digital revenue. For all three metrics, we exceed our year-end guidance, putting us a full quarter ahead of schedule. This impressive performance is a testament to our operational efficiencies, on our team's ability to execute on our strategic initiatives. Our three pillar digital growth strategy is a foundation of our investment. vissis and the execution of the strategy is that the core of creating value for our shareholders.

Sustainable long-term digital revenue growth from our three -par initiial initiatives will transform the mix of our revenue base, driving margin expansion, stronger free cash flow generation, which will fuel debt reduction and enhance our balance sheet.

The stronger balance sheet and improved operating cash flow, combined with multiple expansion fueled by increasing digital revenue, brates a strong path to significant long-term value creation for our shareholders. Our strategy leverages key. These key strength: our local market expertise, our industry-leading digital revenue growth and our commitment to the highest quality news to both 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 being driven by increased digital subscriptions and increased digital advertising revenue.

Our three polllar digital growth strategy is guiding our transformation to a vibrant and digitally-centric company. We're focused on expanding our digital audiences, growing our digital subscription base in revenue, and diversifying and expanding our offerings for local and regionital advertisers.

Par one focused on expanding digital audiences. With investments in user experience, multimedia presentation formats and Rich high-value content. We're driving higher engagement, outsized traffic and monetization, leveraging our trusted brands. Strong market position in in-house capabilities. We continue to make investments that add significant value and drive additional growth.

billar two is about the expansion of our base of digital-oil subscriptions and revenue by converting more of our vast addressable market to subscribers. And it's paying off because we're the fastest-growing digital subscription platform in local media and have been for 10 straight quarters.

Digital-only subscriber growth continued at a rapid pace in the third quarter, up 49% over the prior year. We now add 501 thousand digital-only subscribers, exceeding our fiscal year-end guidance a quarter ahead of schedule. At the same time, we're driving an increase in average rates for digital-only subscribers, which were up 7% in the third quarter compared to the second quarter.

We're leveraging cutting-edge data and technology and expanded offerings for paid niche content on topics where we have expertise and unique selling positions. These tactics are driving an increase in total subscribers in position us to achieve our goal of reaching nine thousand digally subscribers. By the end of 2020 -six.

Reaching nine thousand digally subscribers, increasing our average digital subscription rates, our important goal in Le digital transformation, as the increased the base of our subscription-based digital revenue.

Our third pillar focus is on diverse finance spending offerings for advertisers, and we're doing that in two ways. First, through amside digital are full service omniichannel digital marketing agency that provides local and regional advertisers with sophisticated custom solutions including consulting, media valuing and analytics.

Second by maximizing the revenue opportunities on lease's. Digital platforms are owned and operated properties attract massive audiences. We offering more video inventory and branded content opportunities to drive digital pad revenue. Both of these initiatives are supported by lease' vision platform. Vision is a proprietary sales and the implement and execution software tool powered by amplified digital.

Industry-wide omnichannel advertising for local advertisers is expected to continue double-digit growth in the next two years. The vision platform allows us to capture that significant growth in this category, and the vision platform has transformed local advertising for the.

Our strategy and execution are expected to result in 4- 35 million of recurring sustainable digital revenue by 2026, and whether third quarter results were more than half way there, we've launched our three AR digital strategy in early 2021. We made tremendous progress since the launch, including industry-leading growth in digital subscribers and and digital agency revenue. Digital subscriber growth at leases outpaced our industry peers for the last 10 quarters in coun and, as I mentioned earlier, we is the fastest runreading digital subscription platform in media, with more than five thousand digital subscribers up 49% in the third quarter.

emi-digital agency revenue is significantly outpacing the industry as well, facing 69 percentage points ahead of our next closest industry, peer.

As a result of our industry leading digital growth, total digital revenue over the last 12 months grew to 224 million, up 24% compared to the prior year. We are rapidly changing the midst of our revenue and in the third quarter, total digital revenue now represents 32% of our total operating revenue.

2022 is shaping up to be a successful year. Italy, we certainly have been presented with many challenges year-to-date and'd like to see this done year-end and year-out. That to overcome many headwinds, including a supply chain shortages that impacted local and national advertisers for much of the fiscal year, accelerated declliines in demand for print advertising shopping, national advertising demand and significant inflation fect ING as all aspects of our cost structure. But it could be more proud of this team for their smart thinking, their stecessast commitment toward our three pillar digital growth strategy and the rapid execution of our planned spread value for our shareholders.

Efforts of this team has driven substantial growth in digital revenue. Put is head of our plan on digital revenue targets and importantly, you now on track to achieve our failure: our full year guidance of adjusted EBITDA.

Our third quarter results clearly demonstrates the success for our three -polar digital growth strategy to transform Ally into a vibrant digital-centric company.

And I ll turn over to Tim bit more details on the results for the third quarter and the outlook for asy twenty-two.

Thank you Kevin, and good morning everyone.

To reiterate Kevin sentiment, we are pleased with our third quarter results on the progressing digital transformation at we and are thrilled to report we have achieved our full year targets on many of our digital revenue metrics ahead of schedule.

In the third quarter, total operating revenue was 195 million, down less than 1% to the prior year, as the growth of our digital revenrevenue streams almost offset the decline in our print revenue stream.

Total digital revenue increased 27% in the third quarter to $61 million, driven by rapid growth to amplified digital and in digital-only subscription revenue.

32% of our revenue in the third quarter was digital revenue, up from 25% a year ago.

Digital only subscription revenue increased 50% and total $11 million in the third quarter. We now have 501 thousand paid digital only describers, up 49%, and that exceeds our year-end target of four hundred and ninety-five thousand.

As Kevin mentioned earlier, he remains the fastest-growing digital subscription platform in media, a title we have held for the last 10 quarters.

digital-onlyed subscription revenue over the last 12 months total $37 million, facing well ahead of our full year target of thirty-three million.

Digital advertising and marketing services revenue reached the inflection point and now represents 51% of our total advertising and marketing services revenue in the third quarter.

Digital advertising revenue increased 27% and totaled 46 million in the quarter.

Amplified digital, our full service digital marketing solutions agency. Fuel of the growth, with revenue of 20.000021 trillion in the quarter, up 74%.

Amplified digital revenue total 66 million over the last 12 months.

Exceeding our fiscal year end estimate of sixty-five million.

Total print revenue was 134 million in the quarter, a 10% decline compared to the same quarter a year ago. D into continued secular decline in supply chain constraints affecting national advertising.

Operating expenses total to 19 million and cash costs were up 1%.

Increases in cash costs were attributed to strategic investments in digital talent and technology tied to our digital growth strategy.

Increased digital cost of goods sold and a general overall increase in prices due to the inflationary environment.

Lastly, net income to zero- two thousand and adjusted EBITDA toll $23 million in the third quarter.

As Kevin mentioned earlier, we faced a number of headwinds so far in fiscal year' 22, including dealing with rising prices that are impacting our cost structure.

For example, news print prices increased several times in the fiscal year in total of 30% increase. That will have a four cent to $5 million annualized impact on our cost structure.

And that's just one example.

one way we are addressing this is we are focused on managing the profitability of our print business, as secular changes affects the demand for these products and services.

As we discussed last quarter, early in the third quarter we completed a 14 -week deep dive into all aspects of the print organization.

Optimizing our cost structure distribution manufacturing, named national content.

Marketing finance, it and other corporate services.

This process evaluated our external spending as well as human capital, and was done to better align our cost structure with our long-term strategy.

As a result of this review, we executed on expense actions that we expect to reduce cash cost on an annual basis by $45 million.

executionally invarious pactrs began early in the third quarter and we are on track to achieve more than $2 million reductions for our costs in the last two quarters of aboutfy twenty-two.

While we remain focused on maximizing our efficiencies and reducing the cost structure of our legacy print business and growing profits, our main priority is to drive long-term sustainable digital revenue growth.

We aim to invest in areas that are aligned with our three -pillar digital growth strategy.

Local content, development of our digital products and digital talent to drive results are the key investment areas for Lee in this fiscal year, as well as throughout our digital transformation.

This year we expect $36 million of incremental investments in our strategy.

These investments will have a short-term impact on our margin profile, but are expected to have a great return and drive these digital transformation.

As we mentioned earlier, our solid digital revenue growth in the third quarter resulted in up achieving our previously communicated year-end guidance for digital subscription, digital subscription revenue and total digital revenue a quarter early.

We wanted to provide some additional thought on our fourth quarter expectation as we finish our fiscal year in September .

We expect continued growth in digital-onlyed subscribers, earning $11 million in revenue in the fourth quarter.

This will result in $39 million in digital-onlyed subscription revenue for the fiscal year.

On the advertising side, we expect 47 million of digital advertising and marketing services revenue in the fourth quarter.

About 22 million of that coming for amplified digital.

For the fiscal year, we expect $179 million of digital advertising and marketing services revenue and more than 75 million of amplified digital revenue. Both of these expectations are improvements from our previous outlook.

From a cash flow perspective, we are reaffirming our full year adjusted EBITDA guidance of 95 cent to 98 million, which revolve in fourth quarter. Adjusted EBITDA of to 29% to 32 million or 13% - 25% over the prior year.

All results through the first three quarters of the fiscal year, combined with the tactics we continue to execute, give us the confidence to improve our expectations from many of our digital revenue metrics and to reaffirm our adjusted EBITDA outlook.

Moving to the next lidethe, princial amount of debt at the end of the arter was 463 million, down one 413 million since our refinancing in March of 2020.

As a reminder, our credit agreement with Berkshire halfway our sole lender- has favorable terms that are incredibly importance for us as we execute our strategy, as it allows us the ability to make the necessary investments in talent and technology that fuel our recurring, sustainable revenue growth.

Our pensions are, in the aggregate overfunded, So we do not expect any tension. Contributions in the fiscal year.

Finally we continue to identify opportunities to monetize real estate which facilitate accelerated debt repayment. We generated $25 million of proceeds from asset sale over the last two year and have already closed $14 million of real estate in the first nine months of the year.

As a reminder, our goal is to achieve our long-term leverage targets of 1- two point a half time by the end of 2020. -six and.

As we have shared on the last two quarterly call.s, we are providing metrics to get better transparency and clarity on our digital transformation progress.

This table summarizes our improved fiscal' 22 outlook, demonstrating our progress towards our 2026 goals.

As you can see, we are making significant, continued progress on our digital transformation and we expect this to continue over the next several years.

We have already established a strong track record for accelerating digital subscription growth and with the planned incremental investments in talent technology, we're on track to regach Ard goal of nine thousand paid digital loan subscribers in twenty-six.

Continued execution of that strategy is expecting to generate recurring, sustainable digital subscription revenue exceeding $1 million.

Amplified digital dramatic growth trajectory is fueling our five -year digital advertising outlook.

Our vision platform uniquely positions us to capitalize on double-digit growth and omni-ichannel digital advertising.

With advanced data-driven adtech. Specialized category expertise.

gayable custom video content and powerful first-party data access.

Amplified digital is a strong partner for lo-home regional businesses looking to drive growth.

We expect to reach 31 million of annual digital advertising revenue by 2020 -six.

Of which about two million will come from amplify digital.

Total digital revenue is expected to be 435 million in 2020 -six.

About I'll turn it back to Kevin. To wrap up thanks, Tim. Under the guidance and oversight of the Board of Directors, our leadership team's continued execution of our growth strategy sets the stage for significant long-term value increation. We're very pleased with a thir quarter results in the progress we're making towards the targets and our three pillar digital growth strategy. These strlong presence as the trusted source and information and the communities we serve, combined with cutting in digital capabilities, is a foundation of our digital transformation. The success of our transformation is reflected in the continued rapid growth of our digital subscription, digital or reaudience revenue and digital advertising and marketing services resultsto wrap up, I'd like to thank in entirelylead team for their efforts in driving our transformation. We have the right Board, the right team and the right strategy and I believe we're better positioned than ever to create long-term value for our readers users, advertisers and shareholders. This concludes our remarks. The team more man on the line frame question. You may have operative pleased to open the lines for questions.

Thank you. At this time, you'll be conducting a question and answer session. As a reminder, if you're assing this call by webcast, you may submit tight questions on your screen. Those questions will be answered during the call. As time permits, one moment Please, while we poll for question.

Hi this is my kinski. I have a acouple ofquestions. First of all, I want to congratulate you on your quarter- I mean you did a great job- and then also the guide for Q4. I CAn't tell you how much of a relief it is to hear someone actually beating my expectations for the quarter in this environment. A couple questions. Your guidance on amplified it is obviously a little better than what I was looking for, it seems like. Can maybe correct me if I'm wrong that you're anticipating almost 80% over 80% growth and amplified in Q4. Can you talk a little bit about the progress you've had with amplified, what you're seeing and with the customers, what you're talking about, why you're seeing such very strong growth, and just give us a little color there. And I have a couple of other follow-up questions.

Yes I'll starting body that once. That please do. I think the key to our success is the vision platform we've talked a lot about upon a couple of calls really gives a local sales for the ability to create a nomniichannel marketing campaign for an advertiser. Really with the push of a button and in real-time generate a pretty sucsistent campaign and I that the analytics to back up that campaign. That prises results for advertisers and what we're finding is strong retention at the local, regional advertising level because of the success of what the campaigns deliver.

For the advertisers.

That right, and you obviously implemented some cost reductions in the quarter. Was just wondering when did those actually start like what months and when we will start cycling against those, and where did most of the cost cutting come from? If you can just give us a low color on that?

Yes So we made a number of actions throughout the third quarter. They began in April , a lot of them took place in May, So really it affected really the entire organization in terms of.

Know in terms of departments for for the cost structures. I think the one thing that I say that the focus was on the print revenue streams, anything that supports the print revenue streams, was our focus as we continue to drive from profitability, as those revenue streams continue to mature, significant areas the cost reductions were' looking at our real estate portfolio know, looking at cost tied to distribution of our print products in other areas like that. one areas where we were', where we want to remain focused on investing is areas like local content generation, digal product development. Those areas, those there are hope and so those are the areas where we're really focused on continuing to invest but, at the same time, focused on on driving profitability or print products by managing costs.

vendigital only subscribers you mentioned the rates were up 7%. What is the average rate now? And then, can you talk a little bit about if there were any particular promotions changes and promotions decreases and promotions increases in pay Wall, things like that that may have accounted for not only the rate growth but the growth you saw in digital only.

But in terms of the rates, I can comment on the rates. So we're a little long: $7 a ammonth for digital only subscriptions, and so continuing to focus on using data to drive our decisions on go-to-market, on how we market our products, has been successful.

And then really liveok.

All there might both. one of the great things about this is that's a very high margin piece of business force.

Right and I was just going to ask about the margins and the keyingthing here. Obviously in driving your cash flow growth will be to improve digital margins. Can you talk a little bit about your expectations of margins and expansion as you kind of go into fiscal' twenty-three?

Yes I can do that. Though we were, we came into 22 with our eyes, while open with respect to what we Re thinking in terms of margin and the impact of making the digital investments- that they would have to have a short-term, temporary impact on our margins, but we do expect- we moving into latter part of 23 and into 24, that we will start to see some margin expansion as we get returns on those investments we're making.

Okay great, my congratulations again. Thank you, that's all I had.

Well that wraps up questions. I really appreciate your interest in Lee and thank you for joining us on today's call.

Thank you, Ladies and gentle MENA. At this time, we have reached the end of our question and answer session. This concludes our call.