Q3 2023 Gannett Co Inc Earnings Call
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Thank you good morning, everyone and thanks for joining our call today to discuss connects third quarter 20 twenty-three financial results.
[noise] on today's call will be migrate chairman and Chief Executive Officer Dub Horn, Chief Financial Officer, Christian Robert can that media Chief content Officer, Chris Cho President of digital marketing solutions.
To begin that website, you will find that we are posting earning supplement an additional earlier press release will be referencing it today on the call I did provide you with additional detail on this quarter's performance.
Before we begin please let me remind you this call is being recorded.
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 and the earning supplement as well as a risk factor as described in can that's filings made with the I C C.
Kept as required by law, we undertake no obligation of 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 adjusted EBITDA margin and adjusted net income attributable to get at you can find reconciliation of our non-GAAP measures to the most comparable U S GAAP measures in the earning supplement.
Lastly, I would like to remind you that nothing on this call constitutes an offer to sell or solicitation of raw for the purchase any interest in getting at the webcast and audio cats are copyrighted material of going at it may not be duplicated reproduced.
Broadcast it without prior written consent with that I would like to turn the call over to migrate connects chairman and C E O.
Thanks, Matt.
Good morning to all of you and thanks for joining a call. This morning.
We continued to make progress in the third quarter across dark key priorities.
We saw solid adjusted EBITDA growth of 15% year over year, we saw further growth in digital revenues and we meaningfully reduced our debt and leverage. We also grew our audience by 7% year over a year and what is already a large base.
Within the quarter, we repaid 65 million of debt, which combined with our adjusted EBITDA growth reduced our firstly net leverage below two times.
We also maintained a strong liquidity position of 109 million at the end of the third quarter.
Equally important digital revenues surpassed 40% of total revenues growing 3% year over year on the same store basis, and we expect this trend of growth to continue in Q4.
Then two three we saw audience growth and engagement improve and we achieved a record high end digital only subscription or poop <unk>.
Resulting in ongoing digital only subscription revenue growth.
We continued to grow our D M S business it healthy margins.
Since the end of the third quarter, we also announced additional partnerships to further diversify the monetization of our audience.
At the core of our future growth lies the mission to expand our audience.
Maximize meaningful monetization avenues, and we are pleased with the progress made in the third quarter.
While we made great strides on our strategic priorities.
We must acknowledge the complex economic environment in which we are operating.
We believe there are signs that consumers are beginning to feel the cumulative impact of higher interest rates and continued inflation.
Which has led to an overall reduction in consumer confidence.
As a result, the small and medium sized businesses, we serve have become more cautious in their approach to advertising expenditures than we had previously seen.
While these headwinds impacted our top line performance, we still achieved sequential improvement in same store revenues for the third consecutive quarter.
We will remain diligent in our approach to planning considering what remains an uncertain environment.
We have reduced our full year 2023 outlook, but our view and net income and adjusted EBITDA is not markedly different than where we then the outlook we gave to start the year.
We will continue to exercise prudent cost management to drive are expected meaningful full year growth and adjusted EBITDA.
Our digital revenue growth is based on the growth of D. M S and maximizing the revenue per user on our media platform.
While digital only subscription revenue growth remains a key element.
We are combining it with a focus on overall monetization.
We have an impressive diligent digital audience and that audience is growing.
We are beginning to see positive returns from our investments and content as evidenced by our large organic audience growing 7% year over year to 189 million average monthly unique visitors.
Of which 138 million of those visitors come from our USA today network as measured by Comscore and $51 million from our UK digital properties.
We believe the largest opportunity for revenue and profit gook growth along with shareholder value creation lie.
Lives in a comprehensive strategy that monetize is that full audience at various stages of their journey with us.
This encompasses digital subscription revenue.
Digital advertising revenue the affiliate and the commerce revenue in future product innovation.
A singular focus on any one of these revenue streams comes with degradation to the overall opportunity.
Therefore, we are focused on a holistic monetization strategy that ensures we maximize the revenue opportunity across the entire spectrum of our audience.
The focus in 2023 on the quality of our digital subscriber acquisition strategy continues to show positive results.
In the corner, we saw a modest sequential growth in digital only paid subscriptions and.
And substantial growth in digital only subscription <unk>.
Q3 actually reflects our highest digital only subscription <unk> today and is rooted in the highly local and relevant content our teams produce.
We believe there is meaningful additional upside for both digital only subscription and our poo growth and we anticipate continued digital only subscription revenue growth.
As we maintain our focus on smarter customer acquisition.
In depth local content and effective pricing strategies.
Another key component to translate audience growth into increased monetization per user this through the creation of additional meaningful revenue streams on our platform.
We continue to make strides with partnerships as we are line as we are aligning with brands that share our values and are expected to expand our audience.
Over the past year affiliate revenue started to be realized with the implementation of gambling dot com to provide relevant content for sports enthusiasts.
And Forbes marketplace for personal finance content.
We recently announced to more partnerships with Jack pocket and Red ventures that will further expand the monetization opportunities of our growing audience.
As the exclusive digital lottery courier of the USA today network.
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The Jeff pocket deal Leverages, the extensive lottery related content, we already produce within a single hub.
Additionally, we executed a partnership with Red ventures, one of the largest independent affiliate marketing companies with brands such as C. Net.
Right and the point Sky.
The multiyear venture will help consumers find the best broadband service providers for home and small businesses through original content and Red ventures patented technology.
This initiative is expected to launch in Q4.
These partnerships are expected to drive audience growth and engagement along with high margin revenues.
We expect the affiliate revenue stream to become a much more significant contributor to overall revenue over the next few years.
Before reviewing our local I Q business I'd like to actually turn the call over now to Christian Roberts R. Chief content Officer, who will discuss the exciting momentum we are seeing in our audience growth Christian.
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Thanks Christian.
As you can tell we have a lot of great things going on in contact that's driving audience growth, which is gonna really lead to a much more revenue upside in the future.
Now I'd like to turn to local I Q, a digital marketing solutions business.
In the third quarter re recorded core platform revenue of $120.8 million, an increase of 1.8% you over here.
We continued to generate double digit adjusted EBITDA margins, while serving over 15000 customers on our platform.
We reported year over year growth and both core platform or poo and budget retention.
We continued to expand our D M S product offerings through our premium experience.
Which contributed to our D. M S registered registered user surpassing 185000 in the third quarter.
A registered user account has consistently shown impressive growth.
Demonstrated by the 10 fold increase from 18000 registered users in the prior year quarter.
These premium registered customers are in addition to our core platform customers.
And I'd like to hand, the call over to Chris Cho, who joined in Q2 as the president of local I Q and he'll share a few remarks on the business and provide insight into some of the strategic initiatives, we have emotion Chris. Thank.
Thank you Mike.
And the third quarter R. D M S business maintain strong fundamentals, although our growth was tempered.
Through customer interactions, we noted a cautious sentiment among our largest customer segment home services regarding economic uncertainties tighter rising of raw material costs and lower consumer demand. However.
However, we are pleased to see improvements in both client and budget retention along with improvements in how we operate.
For example, we have created a blueprint for our digital factory line and identified several fulfillment processes that can be enhanced through technology.
Our goal is to streamline operations remove redundancy and ultimately translate these efforts into enhance profitability and an improved customer service experience.
In addition, Griffin D. M. S requires an increase in our mastery over the core digital advertising and marketing business.
To ensure a sustainable growth, we will accelerate new product development as.
As well as focus on several key areas such as automation for efficient campaign management.
Innovative bundling to enhance customer outcomes and retention and ongoing improvements in reporting and intelligence capabilities.
Furthermore, we are collaborating across the network sharing best practices and unifying systems to reduce costs.
And improve efficiencies and order entry and billing.
With renewed operational discipline, we believe our business is poised to reliably grow top line revenue over the long term and add new customers.
Mike.
Thank you Chris we're so glad to have Chris I'm bored, leading a local I Q business and we're really excited to see how that business develops and grows thanks for the update Chris.
Overall, we had a solid third quarter with strong execution across dark key financial metrics we.
We saw significant improvement in that income sustained growth and adjusted EBITDA and continued expansion of our digital revenues.
Our same store revenue trends improved for the third consecutive quarter and year to date, we've generated $43 million, a free cashflow, which is up 46 million compared to the prior year.
We also continued to improve our capital structure through significant debt reduction, while maintaining a healthy balance sheet and strong liquidity position.
Importantly, we expect to end the year with growth and both total digital revenues and adjusted EBITDA.
We expect significant free cash flow generation and meaningful debt reduction in firstly net leverage below two times.
This momentum fuels, our enthusiasm for ongoing revenue trend improvement in future growth opportunities.
With that I'd now like to call to turn the call over to death warrant to provide additional detail and color around our 2023 third quarter financials as well as the details on our updated full year 2000 twenty-three guidance Doug.
Thank you, Mike and good morning, everyone as Mike mentioned, we produced another solid quarter of financial results.
To begin with our consolidated results and just a note all comparisons are on a year over year basis, unless otherwise noted.
Q3, total operating revenues were $652.9 billion, a decrease of 9.1% or 8.4% on the same store basis.
This represents a 20 basis points sequential improvement from Q2 revenue trends, marking the third consecutive quarter of improvement.
With that said the improvement was smaller than we anticipated as the benefit from our growth initiatives was partially offset by a more challenging operating environment.
However, I am pleased to report that many of the strategic actions and initiatives. We haven't place are yielding positive results.
On the cost side, we continue to align our expense structure with recent revenue trends in Q3 operating expenses decreased approximately 17%, reflecting our commitment to prudent cost management as well as the successful execution of our cost optimization efforts.
We anticipate additional benefits from these efforts in the upcoming quarters and remain committed to preserving our resources in the markets. We serve while also investing in key areas for future growth.
The decline in operating expenses also reflected a significant reduction in integration and reorganization costs during the quarter.
Adjusted EBITDA totaled $59.5 million in the third quarter, an increase of 15% or approximately $8 million a.
Adjusted EBITDA margin was 9.1% compared to 7.2% in the prior year quarter.
The growth and adjusted EBITDA was driven by our strategic cost controls and the continued operational transformation.
We are also pleased to see deflationary pressures for certain raw materials, and we anticipate these cost savings will contribute favorably to our operating expense trans moving forward.
In the fourth quarter, we will cycle some of the larger temporary cost savings from the prior year, but as a result of our cost efforts. This year, we still expect meaningful adjusted EBITDA growth in 2023.
Total digital revenues in Q3 or $263.6 million up 2.7% on our same store basis and up 1.9% sequentially.
In Q3 total digital revenues surpassed 40 per cent of our total revenues.
Digital advertising within total digital revenues also returned to growth in September for the first time in more than a year.
The improvement in digital advertising was primarily driven by increased inventory tied to growing pages, which are are a result of our content strategy.
This is a promising sign which we believe positions as well for ongoing digital revenue growth.
Turning to the media segment.
Are digital only subscription revenues surpassed $40 million and grew 16% on the same store basis.
Are digital only paid subscriptions continue to reflect the intentional actions to optimize our acquisition costs by prioritizing longterm monetization versus shorter term volumes.
Despite a slight decrease in digital only paid subscriptions. We are encouraged by the sequential growth in the third quarter after two quarters of small declines.
We believe these deliberate actions are paying off evidenced by digital only subscription <unk>, achieving a record high of $6.82 and growing 14% compared to the prior year.
We expect <unk> to increase in the upcoming quarters as we maintain our focus on attracting and retaining more profitable subscribers.
Print advertising revenue decreased 11.1% on the same store basis due to ongoing secularity clients. However, our print advertising revenue trends improved 100 basis points compared to the same period in the prior year.
Our results in print circulation remain consistent with the trends we saw at the end of Q2.
We do expect further trend improvement in the upcoming quarters as a result of our continued efforts to improve the subscriber experience.
We believe our investments are addressing open routes and distribution challenges are yielding results evidenced.
Evidenced by the percentage of open delivery routes decreasing over 20% versus the same period in the prior year.
Additionally, our conversion to mail delivery is it is expected to deliver a more consistent service level tour consumers in those areas, where staffing delivery routes is more of a persistent challenge.
At the end of the third quarter, we successfully converted 11 markets to mail delivery with plans for approximately 30 more markets before the end of the year and additional markets in 2024.
In Q3, or other revenues category, which includes commercial printing and delivery as well as other digital syndication an affiliate revenues experienced transit negatively impacted our overall revenue.
While we saw growth and our affiliate revenues. This overall revenue stream experienced a 6.2% decline on the same store basis.
The decline was caused by lower commercial print volumes as a result of the secular trends and digital syndication revenue driven by lower partner monetization of our content.
Moving now to our digital marketing solutions business.
Total revenue in the third quarter was $121.9 million, an increase of 1.9% on our same store basis.
Justin EBITDA for the segment was $13.6 million, representing a margin of 11.1% in the third quarter.
The results in our digital marketing solutions business reflect the consumer and advertiser trends that were mentioned earlier.
However, we believe our continued focus on improved execution, along with the development of additional products and features.
We will increase our addressable market and help us navigate and mitigate these headwinds moving forward.
Average monthly customer count remains stable compared to Q2, but decreased 3% to the prior year period due to the previous optimization of our product portfolio, which eliminated lower margin offerings.
Four platform or poo grew 5% versus the prior year period and remain near record highs.
Additionally, R Q3 customer budget retention was 95, 4%, representing an increase of 20 basis points.
Let's now shipped to the balance sheet.
At the end of the third quarter, our cash balance stood at $109.2 million translating to net debt of approximately $1 billion.
We generated $7.4 million a free castle in the third quarter, bringing our year to date free cash flow to $43.7 million, which is up $46.7 million from the prior year period.
We anticipate additional free cash flow growth in queue for with an estimated conversion rate of at least 30%.
I'm pleased to report that our first lien net leverage is now below two times.
This reflects $65.3 million, a total debt pay down in the third quarter as well as improved adjusted EBITDA performance.
Notably R Q3 debt reduction of $65.3 million is the highest quarterly paydown figure in two years.
During October we repay at an additional $6.2 million on our term loan using the proceeds from real estate asset sales.
Year to date, we have repaid $124 million of debt.
That debt repayment remains a top priority for us and as a result, we expect our first lien net leverage to remain below two times at year end.
In Q3, we completed eight real estate and other asset sales totalling $51.5 million, bringing our year to date total for real estate and other asset sales to $82.7 million.
We continually review our full product portfolio, and we will continue to sell non-core assets, which will allow for flexibility.
And for reinvestment in the business as well as ongoing debt repayment.
Turning now to guidance.
Based on the trends you heard from Mike and Chris We now expect our 2023 full year adjusted EBITDA to be in the range of $270 million to $290 million as compared to $257 million in 2022.
Free cash flow is expected to be in the range of $65 million to $85 million, representing a significant increase tour of 2022 results.
Our outlook also reflects an assumption that same store revenue trends will be down between eight and 9% for the annual period, but we are expecting fourthquarter trends generally in line with those of the third quarter, indicating a further reduction and revenue losses compared to the first half of the year.
In the third quarter, we made continued progress on our long term digital growth strategy. We believe this progress demonstrates attraction we have gained.
Further validates the company's strategic plan and represents just the beginning of the value we expect to capture overtime.
Our commitment to the successful execution of our strategy and most importantly, our readers and customers is unwavering.
We believe these priorities will keep us firmly on the path to achieving our transformation goals and delivering significant longterm shareholder value.
I will now hand, it back to the operator for questions and then after after questions. We will go back to Mike for some closing thoughts.
Thank you, Sir ladies and gentlemen, we will not be conducting the question and answer session.
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Thank you good morning, I just on the digital subscription strategy I mean that Ah 40 million in quarterly run rate is a nice achievement it looks like you've reached.
Regain some momentum on sub grows.
Sort of pivoted.
A year year, and a half ago toward higher pricing slower growth to sort of maximize return.
Is there a point in time, where you pivot again to kind of growing.
Aggressively the numbers subs to kind of wrap this up or or are you satisfied with the trend right now thanks. Thanks.
Thanks for the question of our our focus and we believe the biggest the single biggest opportunity for a company from a growth perspective at a profit perspective is actually the monetization of that full audience of 189 million unique switches uniques, which is growing.
A certain number of gonna pay for digital subscriptions, so a more wholesome or holistic monetization strategy on the full audience and making sure that full audience not only grows but is more engaged with us leads to the biggest revenue opportunity going forward. So we'll take a very balanced approach to growing that.
Digital subscriber base with growing <unk>, but in addition, growing our digital advertising business growing our affiliate revenue in e-commerce business and being able to launch new products.
Such as substantial audience space, that's growing so it's really a holistic approach to monetising the entire audience versus any one singular approach.
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Is it sort of the.
Economic retail woes in print is it the fact that you're annualizing, the big cost cuts a year ago, what sort of been the big surprise in terms of lowering your full your guys.
But where it was well I think what's <unk>, what's what's really changed.
We've seen the consumer start to feel squeezed and that's impacting discretionary spend in certain categories, one of which is home services, which happens to be a category. That's that's a good category for us while while we see short term weakness in that category from.
What the what the consumers actually experiences experiencing we don't expect that to be a long term thing in home services is a great category that we expect to continue to return to.
Normal operating for US as we go forward into 2024, so short term headwinds the consumers feeling some pain for sure.
Higher interest rates, a little bit less access to capital for discretionary spending the home services category, but we don't see it as being anything or two significant as we look out to 2024.
Great. Thanks Bye.
Thank you ladies and in case meant it appears we have reached the end of a question and answer session.
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Thank you.
So given that in our digital transformation strategy, absolutely requires long term thinking even as we navigate short term volatility.
Over the past 18 months, we've implemented several initiatives aimed at building a solid foundation inverse.
Investing in key growth areas and executing on a transformation objectives.
As we head into Q4 and beyond we will build on that progress and accelerate our efforts to further drive the speed of our transformation.
I want to share some thoughts with you that are important and give us great optimism when we look to the future company we are building.
We continue to make meaningful progress in reducing debt and leverage reducing firstly net leverage below two times was a nice milestone this past quarter.
We continued to grow adjusted EBITDA in the third quarter, and we expect to see adjusted EBITDA growth for the full year of 2023.
We expect to generate significantly more free cash flow in 2000 twenty-three than in the prior year.
Our digital revenues surpassed 40% of total revenue in the third quarter.
Our digital revenues have returned to growth.
And we saw that growth trend increase a bit in Q3 sequentially from Q2.
With all the various initiatives we have in place.
Many of which you heard about on the call. This morning, we expect to see expansion of that growth trend in 2024 and.
And we expect digital revenues to continue to become a larger percentage of our overall revenues.
Are paid digital subscription subscription strategy. This year is showing encouraging results.
We saw significant increases in our poo and digital only subscription revenue.
Digital only subscription or poo hit an all time high for US. However, we believe there is still considerable upside to our pool and two are paid digital subscriber base.
Our content strategy is also showing very promising results.
We are seeing our audience grill along with engagement.
And we believe this will lead to better monetization opportunities as we focus on total digital audience monetization across several different revenue streams.
Our focus on external trusted content partners is also showing positive results we.
We assigned for partnerships this year.
To our brand new but for the two launched earlier this year, we are seeing better audience engagement than we originally expected.
As these partnerships continue to mature we expect meaningful revenue growth from them and there's a as I mentioned earlier. This is very high margin revenue.
The strategic initiatives, we are implementing to evolve this business to a digital business are working.
The initiatives, we have in place to grow EBITDA and free cash flow are working.
The fast pace of debt and leverage reduction is working.
Will navigate any near term uncertainty that we need to while staying focused on our transformational actions we.
We believe our current strategy will result in a sustainable revenue and profit growth business.
And we are optimistic about the future as well as our ability to create value for our shareholders as we execute on these plans.
Thanks for your time today, and we look forward to updating you again as we close the year.
Of 2023, Thank you all.
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