Q3 2023 Lee Enterprises Inc Earnings Call
Okay.
Welcome to the Lee Enterprises, 2023 third quarter webcast and conference call.
It's being recorded and will be available for replay at investors directly dot net.
At the close of the planned remarks, there will be an opportunity for questions.
Disappoints accessing this call by webcast may submit written questions through the website and they will be answered during the call as time permits.
Rice, you will receive a response later.
A link to the live webcast can be found at investors Dodsley Dot net.
Now I will turn the call over to your host Jared Mark's Senior Director F. B I D.
Good morning, Thank you for joining US in addition to myself 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.
Earlier today, we issued a news release with preliminary results for our third quarter of 2023.
It is available at <unk> dot net as well.
Major financial websites.
Also refer to our earnings presentation found that investors Dot dot net that includes 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.
Our SEC filings.
During the call, we will 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 is our president and Chief Executive Officer, Kevin Mowbray.
Kevin will open the conversation on slide three of the earnings presentation for those following along.
Good morning, everyone and thank you for joining us our third quarter results represent solid digital growth, especially revenue growth tied to our digital subscription offerings.
Well as strong revenue growth in onsite digital as we continue to grow our digital businesses and industry leading clip.
Later in the call to review, our third quarter results, including our updated FY2023 guidance.
I'll discuss how we continue to accelerate our digital transformation.
There are three pillars digital growth strategy.
Our third quarter digital subscription results continued to lead the industry by a significant margin continuing our street for the last 14 quarters. We now have 606000 digital subscribers, which represents a 44% compound annual growth rate over the last three years.
This longstanding outperformance gives us even more confidence in achieving our goal of 900000 digital subscribers and more than $100 million of digital subscription revenue.
While the soft advertising environment impacted all aspects of our advertising revenue streams and slide digital grew revenue, 15% in the third quarter and has grown 35% over the last 12 months.
Revenue in FY <unk> digital over the last 12 months totaled $89 million and has grown 40% annually over the last three years far outpacing industry performance.
The growth in digital subscription revenue and outside digital revenue fueled the growth in total digital revenue, which totaled $265 million over the last 12 months and 18% increase over the prior year with solid performance is on track to achieve our FY2023 guidance for total digital revenue.
The significant growth of our digital revenue from our retail our digital growth strategy has transformed the composition I believe overall revenue when we first launched our three until our digital growth strategy digital revenue represented only 21% of our total operating revenue and after two years of execution digital revenue now.
Represents 41% of our revenue.
As we continue our transformation, we expect that by 2026 more than half on our revenue will be digital allowing for consistent overall topline revenue performance.
Our industry, leading growth in both digital subscriptions and amplified what continues to drive lead to this inflection point and now I'll turn it over to Tim for more details on our third quarter results.
Thank you, Kevin and good morning, everyone.
Total operating revenue was $171 million in the third quarter.
Digital revenue growth continued at a strong pace with total digital revenue up 15% driven by 43% growth in digital subscription revenue and 15% growth at amplified digital.
The acceleration in digital subscription revenue growth is driven by investments we have made in top talent in the areas of content branding and consumer marketing. These investments are producing strong results through engaging local content effective branding campaign and Kpis driven mark.
<unk> campaigns.
On the advertising side digital advertising revenue increased 8% compared to the third quarter last year.
As Kevin previously mentioned, we are encouraged by this level of growth given the soft ad market.
Our strong performance is driven by 15% growth it amplified digital our full service agency revenue.
Revenue amplified totaled $24 million in the quarter as we have seen an increase in amplified average revenue per customer over the past quarter.
Our print revenue performance continues to be challenged.
The broader industry is experiencing a pullback in local advertising spend and that has accelerated the declines of our print revenue streams <unk>.
Additionally, we eliminated a number of advertising products that no longer meet our profitability standards.
These decisions adversely affected print advertising revenue trends, but had a favorable impact on adjusted EBITDA.
Excluding the impact of these decisions print advertising trends would have improved by eight percentage points.
On the print subscription side Youre seeing continued higher than historical unit attrition, which is keeping our full access revenue trends down closer to industry trends. We do expect these to continue for at least the remainder of the fiscal year.
Cash costs were down 14% as we responded quickly to the soft revenue environment through a series of permanent and temporary cost reduction efforts.
Adjusted EBITDA totaled $23 million in the quarter with year over year growth of 1%.
Our rapid digital growth and strong cost management is expected to drive solid adjusted EBITDA growth in the fourth quarter.
Yes.
As a result of the continued secular decline in print revenue combined with the soft advertising environment. We continue to be keenly focused on identifying opportunities to further optimize our legacy cost structure.
For the fiscal year, we expect to realize between 86 and $96 million and cost benefit from business transformation initiatives executed midway through last year and new initiatives executed midway through this year.
These actions.
Include reductions to our base of costs that are directly tied to print.
<unk> and distribution manufacturing corporate services as well as print advertising.
The $76 million of annualized cost reductions executed partway through this fiscal year had a significant impact on Q3 adjusted EBITDA.
That is expected to continue in our fourth quarter as well as in fiscal year 'twenty four.
While we are focused on managing the decline of our print businesses as those revenue streams mature our main priority is to drive long term sustainable digital revenue growth.
With that in mind, we continue to invest in talent and technology in the areas of our business tied to our digital future and our commitment to high quality local news remains steadfast.
These targeted investments will be the catalyst that drives our digital future. However, they are impacting our cost this fiscal year.
We expect the investments, we're making this year to total approximately $25 million.
Costs will have a short term impact on our margin profile, but are expected to drive these digital transformation.
Moving to slide nine.
Principal amount of debt at the end of the third quarter was $460 million.
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.
It allows us time to transform <unk> by making the necessary investments in talent and technology that fuel our recurring sustainable revenue growth.
The agreement was executed in 2020 and has a fixed interest rate and a 25 year maturity.
Favorable terms have been incredibly helpful. In a rising rate environment, we have seen over the last few years.
We made no pension contributions in the third quarter and we do not expect any material pension contributions in 2023 of our pensions are fully funded.
Yes.
Finally, we continue to identify opportunities to monetize our non core assets, which facilitates accelerated debt repayment.
We closed $7 million of asset sales this fiscal year through the third quarter.
We have identified an additional $30 million of noncore assets to monetize which are in various phases of the sales process with nearly 5 million expected to close in the fourth quarter.
As a reminder, with solid execution of our three pillar digital growth strategy as well as our commitment to improving our balance sheet. Our goal is to achieve long term leverage target of under two five times.
Slide 11 provides an updated look at our fiscal year 2023 outlook.
With more visibility into the impact of persistent inflation and soft macro environment. We are updating our 2023, adjusted EBITDA guidance to be $85 million and $90 million.
It's worth noting our cost actions have grown adjusted EBITDA in the second half of the year.
And these actions are expected to provide a benefit heading into 2024.
Despite the near term impact of the broader economic issues on adjusted EBITDA. The strong performance of our digital revenue streams. This fiscal year position us well to reaffirm our 2023 guidance for total digital revenue and digital subscribers.
We expect total digital revenue to be in the range of between $270 million and $285 million.
Digital only subscribers are expected to total 632000.
Despite the soft macro environment. This team continues to move with velocity and managing print revenue streams as they mature and grow our digital businesses and industry leading clip.
I am grateful and encourage and this team that continues to produce industry leading results.
And now I'll turn it back over to Kevin.
Thanks, Tim.
Progress on our digital transformation continues to reinforce we have the right strategy and the right team in place our three pillar digital growth strategy is guiding our digital transformation.
The foundation of our investment thesis, we're focused on expanding digital audiences growing our digital subscription base and revenue and diversify and expanding our offerings for local advertising local advertisers slide 14 highlights some key takeaways for our digital transformation.
He is the fastest growing digital subscription platform and local media.
606000, digital subscribers and a vast addressable market sufficient to achieve our goals of 900000 digital subscribers and more than $100 million of digital subscription revenue by 2026.
On the advertising side, which is the fastest growing digital market marketing service provider and our vision platform uniquely positions us to reach local advertisers high demand for Omnichannel advertising and marketing services.
To wrap up I'd like to thank the entire <unk> team for their efforts in driving our transformation as we move through our transformation and achieve our long term goals, we expect to drive significant value for our shareholders through converting debt to equity through a repositioning of the us.
A digital first company.
Under the guidance and oversight of our board of directors. Our leadership team's continued execution of our growth strategies sets the stage for significant long term value creation.
The right board the right team and the right strategy to create long term value for our readers users advertisers and shareholders.
Concludes our remarks the team will remain on line for any questions. You may have operator, please open the line for questions.
Thank you.
At this time, we will be conducting a question and answer session.
As a reminder.
You are accessing this call by webcast you May type you may submit typed questions on your screen those questions will be answered during the call as time permits.
One moment, please while we poll for questions.
Our first question comes from the line of Michael Kaplinsky of Nobel Capital. Please proceed with your question.
Thank you and good morning, everyone.
A couple of things you decreased advertising print products.
David in your remarks, I was wondering I assume that those were mostly TMT products, but did you decrease the number of print days for papers in the quarter as well and then I was wondering if on a same store basis would you be able to give us some idea of what print advertising would be down.
And if you can kind of give us a sense of the trajectory of print decline in the coming quarter given the prospect that you may be.
As you decrease the number of.
Bob.
Print advertising products.
Heading into the fiscal fourth quarter.
Yes, thanks for the question, Mike So I'll.
I had a few different parts. So we did eliminate some of our P&C products.
In the quarter.
<unk> with and without software print advertising perspective.
As reported number was down 33 without down 25% total advertising as reported was down 13, excluding some of the product Dms were down 7% and then from a total revenue perspective, our as reported was down 12 with excluding those products were down.
Ken.
Your next part of your question with respect to elimination of.
Dave.
Some of our smaller markets, we have looked at reducing.
The number of print days.
As additional context to that I'd say over the last three years to four years, we've done a really good job of maintaining and managing the maturity of our print subscription revenue.
And really outpacing the industry in that performance.
Sticking with what we have seen in 2023, we've kind of reverted closer to the industry norms and as a result in some of our markets have re imagined our print product.
And providing a high quality print products three days a week.
And that's great products from our readers perspective, and at the same time has a cash flow benefit to us as well.
Third parts of your question with respect to trajectory for the fourth quarter. What we're seeing is very similar trends that we saw late in the third quarter will carry forward into the fourth quarter from an advertising perspective.
Thanks for all the color there I really appreciate that are there markets whereby the company no longer prints.
Paper has it.
That's where they just moved all to digital at this point or no.
No.
Okay, and then you have a very favorable digital trajectory.
I know that the company continues to invest there, but can you kind of give us a sense win.
Got about the margins and when they will begin to approve maybe a sense of.
The level of investments as you go into fiscal 2024, and what type of margins might be sustainable in that in digital.
Yes.
Great question, what I would say is.
Our digital market margins are expanding.
Closer to what we would've expected.
And our.
Our product our digital products.
You put up good margins, particularly on the digital subscription side incremental digital subscription revenue is very very profitable for us.
The revenue stream continues to grow was up 43% in the quarter.
Got you good growth prospects in the fourth quarter as well and we expect that to continue to expand margins.
Amplified.
It's something that we grew from the ground up.
A few years ago, and we're seeing some nice margin expansion there.
From a digital perspective, we're very pleased with with respect to how we're seeing margins expand and grow.
And on the digital side can you just kind of give us a sense of what's driving the revenue growth or are there particular industry sectors.
What.
What are what are the key drivers that.
Kind of give us some color on that.
Sure ill jump in and you can add color commentary healthcare universities grocery.
All really good categories for us.
France by digital.
Yes, I think from a revenue perspective amplified as well as the digital subscription pieces, a big piece of the driver.
Great and then in terms of you mentioned some asset sales I was just wondering in terms of the proceeds all of that earmark for debt reduction then.
Correct correct.
It's a required debt payment.
Okay perfect. That's all I have thank you.
Thank you now we'll pull some questions from the webcast Tim.
Seeing no questions coming through the web.
To get back to Kevin for closing remarks.
Well. Thank you all for joining us today as I mentioned earlier, we remain keenly focused on transforming our business model for the long term benefit of our shareholders our employees our readers and our advertisers. We really appreciate your time today and your interest and we thank you again for joining the call.
Thank you ladies and gentlemen at this time, we have reached the end of our question and answer session. This concludes our call you may now disconnect.
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