Gannett Co., Inc.
Q3 2018 Earnings Call Transcript

Published: 8 Nov 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Third Quarter 2018 Gannett Company Earnings Release Conference Call. At this time, all participants are in a listen-only mode. And later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] And as a reminder, this conference is being recorded. I would now like to hand the call over to Ms. Stacy Cunningham. You may proceed.

[Stacy Cunningham:]

Thank you. Good morning, everyone, and welcome to Gannett's Third Quarter 2018 Earnings Conference Call. As a reminder, this call is being recorded and webcast. Joining us today from Gannett are Bob Dickey, President and Chief Executive Officer; Ali Engel, Chief Financial Officer; and Sharon Rowlands, President of USA TODAY NETWORK, Marketing Solutions and Chief Executive Officer of ReachLocal. Before we begin, I would like to call your attention to our Safe Harbor provision for forward-looking statements in our financial results press release. The Safe Harbor provision identifies risk factors that may cause actual results to differ materially from the contents of our forward-looking statements. For a more detailed description of the risk factors that may affect our results, please refer to our financial results press release and our SEC filings, including our 2017 Form 10-K. Also, during this call, management's commentary will include non-GAAP financial measures. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in the tables of our financial results press release, which we have been posted into our Investor Relations website at investors.gannett.com. With these formalities out of the way, I'd like to turn the call over to Bob Dickey.

[Bob Dickey:]

Thanks, Stacy. I'm going to start by giving you highlights from the quarter from our marketing solutions and consumer organizations. Then I will turn it over to Sharon for an update on ReachLocal, and Ali will conclude with our detailed financial results. Overall, our third quarter results reflect steady progress on our digital transformation with strong results from our ReachLocal segment, including the WordStream acquisition. During the quarter, we also encountered weakness within our Publishing segment. I will provide more color on that in a moment. However, we expect these trends to continue in the fourth quarter, and are therefore lowering our full-year revenue and adjusted EBITDA guidance. Despite these challenges, we remain focused on delivering growth in our digital business, driving further cost efficiencies and capitalizing on the digital opportunity. Turning to our ReachLocal segment, we reported solid revenue growth and achieved margins that exceeded our expectations, driven by strong growth in average revenue per client. Additionally, this quarter was the first quarter that included WordStream, provider of Software-as-a-Service local digital marketing solutions that we acquired in July. We are pleased WordStream delivered quarterly revenues and adjusted EBITDA that exceeded our expectations due to higher client spending. We truly believe that we have the strongest digital marketing solution set in the marketplace and remain optimistic about our market position and future growth opportunities. Within our Publishing segment, we experienced challenges in the digital media category, reflecting three main factors

[Sharon Rowlands:]

Thank you, Bob. The ReachLocal segment delivered another strong quartet with solid revenue growth, record adjusted EBITDA margin and the launch of LOCALiQ, our data-driven marketing solutions brand that represents our integrated B2B marketing solutions product suite. Given our expanding solution capabilities with the addition of WordStream, we will begin discussing ReachLocal segment revenues within two broad categories

[Alison Engel:]

Thank you, Sharon, and good morning, everyone. One quick housekeeping item to start. Our third quarter of 2018 had 92 days, while the third quarter of 2017 had 91 days. The extra day this quarter was a Sunday, which is our highest revenue day. We estimate the extra day accounted for approximately $11 million in revenue and $7 million in adjusted EBITDA. Looking to the fourth quarter, as a reminder, we will have six fewer days as compared to last year's fourth quarter. Consolidated revenues were $712 million compared to $744 million in the third quarter of 2017. The revenue decline reflects the challenge of print advertising and single copy circulation environment, partially offset by the WordStream acquisition, full access subscriber pricing initiatives, and digital advertising and marketing services revenue growth. On a same store, day adjusted basis, total revenues declined 8.1% in the third quarter. Total digital revenues of $266 million, grew 8% in the quarter and represented 37% of total revenue, up from 33% a year ago. Our total digital advertising and marketing services revenues of $199 million in the quarter rose 8% and reached 49.4% of total advertising and marketing services revenues, nearly hitting the 50% milestone. Adjusted EBITDA totaled $70 million for the quarter, down 5% from last year. The addition of WordStream and solid growth that our ReachLocal segment did not entirely offset the revenue pressures within the Publishing segment. Total same store, day adjusted operating expenses fell approximately 7% year-over-year, reflecting production and distribution savings due to facility consolidations and lower payroll and benefits expenses. These productions were offset in part by higher expenses and our ReachLocal segment associated with higher revenues, and for the first time in years, an increase in same store newsprint expense of 11%, reflecting newsprint pricing pressures largely related to tariffs. Additionally, we incurred higher bad debt than anticipated in the quarter, reflecting several major retail bankruptcies. Turning to the Publishing segment, as we have discussed, we were disappointed with our revenue results, which were down 9% on the same store, day adjusted basis. Specifically our same store, day adjusted digital advertising and marketing services revenues grew only 1% in the quarter, after first half growth in the 6% range. Digital marketing services revenues continue to be a bright spot, up 42% year-on-year on a same store, day adjusted basis. Our client counts and average revenue per client both showed solid growth year-over-year. Within digital media revenues fell 1.7% on a same store, day adjusted basis with a strong national performance offset by weakness at local, which Bob discussed. At national, both our premium and programmatic channels delivered strong results and our strongest categories were auto, technology and financial services. As expected, digital classifieds continue to negatively impact our overall digital advertising and marketing services result, although they did show some improvement from the second quarter. The employment category continues to be our weakest. If you were to exclude digital classifieds and the after mentioned unprofitable affiliate business from last year, publishing segment digital advertising and marketing services revenues were up 10% on a same store, day adjusted basis in the quarter. Same store, day adjusted print advertising revenues fell 20% in the quarter as expected. We continue to see some of the largest declines from our national pre-print advertisers, and within the auto and employment areas of print classified. Switching to circulation, on a same store, day adjusted revenue trends improve to down 4% better than second quarter trends. Our U.S. local markets delivered the best results with revenues down only 3%, because of our full access subscriber per pricing initiatives and several new premium additions in the third quarter. Single copy trends at both USA today and within our local markets remain weak, as expected. Digital only circulation volume growth remained robust in the quarter of 49% year-over-year to $472,000, as we are aggressively targeting new digital subscribers via new marketing tactics as previously discussed by Bob. Turning to our ReachLocal segment, third quarter revenue reached $110 million, up 17% year-over-year driven by the addition of WordStream and solid organic growth offset by the divestiture of our European business and $1 million negative impact of the fair value adjustment to WordStream's deferred revenue. On a same store, day adjusted basis ReachLocal segment revenues grew 8%, we continue to see strong growth in average revenue per client, as the number of products per client continues to grow. As expected we did close on the sale of our business in Japan in early October. The ReachLocal segment delivered another strong adjusted EBITDA margin reaching 16%, up from only 6% in the year ago quarter. There are several factors driving the margin performance. First, we are seeing strong growth in average revenue per client driven by an increasing number of products per client, and a strategic focus on higher spending client. This growth in ARPU is driving scale within our sales and support cost. And secondly, the addition of WordStream added approximately 4 percentage points to the margin in the quarter. We are very pleased with the strong margins, but also mindful of the need for investment to deliver continued revenue growth, so we will be careful to monitor this balance. Our GAAP net income for the quarter was $13 million, down from $23 million a year ago reflecting the year ago tax benefit of $20 million that resulted from the tax write-off of worthless stock and debt in certain ReachLocal foreign entities. Turning to the balance sheet, we ended the quarter with $338 million in debt, including our convertible debt and $170 million drawn on the revolver. Our cash balance was $109 million at the end of the quarter, resulting in net debt of $229 million. Capital expenditures totaled $16 million for the third quarter, reflecting investments related to digital product development as well as product - projects supporting our ongoing facility consolidations. There were no shares were purchased this quarter and we paid $18 million in dividends. Turning to our full year outlook. We are lowering our revenue guidance to $2.9 billion to $2.94 billion, and our adjusted EBITDA outlook to $325 million to $330 million largely reflecting the softer than expected digital advertising and marketing services revenues within our Publishing segment. In the Publishing segment, we expect fourth quarter revenue declines to be similar to the third quarter with the exception of circulation revenues, where we anticipate modest improvement due to higher premium edition pricing and some selectable access pricing initiatives. In the ReachLocal segment, we're anticipating continued revenue growth driven by the addition of WordStream offset by the divestiture of our European and Japanese operations and another quarter of double-digit margins albeit more modest than third quarter levels. Considering the revenue challenges and the need for continued investment in our digital future in the fourth quarter we are instituting an early retirement program, and have announced two outsourcing initiatives within customer service and technology. We anticipate that these initiatives will have significant benefit on our overall cost structure in 2019, but we will not have clarity on the expected savings from the early retirement program until December. While we are disappointed with the weaker-than-expected digital advertising and marketing services revenue results, we believe we are making the right strategic moves with our sales reorganization, new product development and increased focus on digital subscribers that will further propel our digital transformation over time. With that, I will turn it over to the operator for questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Doug Arthur of Huber Research. Your line is open.

[Douglas Arthur:]

Yeah, thanks. Still trying to break everything down here. Just two detail questions. Ali, do you have an update on the pension liability?

[Alison Engel:]

We have I think a significant change in the third quarter. We'll have, obviously, at the end of the year, where we update the discount rate and all the assumptions, that will be more meaningful, Doug. But have a material or significant change in the third quarter. And we'll file our Q later - we'll file our 10-Q later this afternoon that will have all the detail associated with it.

[Douglas Arthur:]

Okay. And then, on the digital subscriptions, I mean, it looks like - well, the number is still somewhat small, 472,000.00. The growth accelerated certainly sequentially. Is there anything to read into that? You mentioned some different initiatives in terms of the meter, et cetera. Is that on track of what you expected?

[Bob Dickey:]

Hey, Doug. It's Bob. The side-door - closing the side-doors and tightening some of the meters, plus we are just - every day, every week, every month, we're getting much more sophisticated in our marketing as we test various things. We're getting better with pricing, with better sales channel, et cetera. Also the team, our newsrooms continue to contribute in a big way, both with just doing an excellent job of communicating with our readers about the content that we are providing, the great journalism we are providing. And we're just consistently doing a better job of targeting that content. So we're seeing engagement improvements. As you saw, our overall uniques were better than the peer group. So it's a combination of really Nicole Carroll and Maribel really getting in the news organization coming along. And Andy and his team are just getting smarter on how to market on the digital side. So we think that what you saw in the third quarter is a great indication of a very positive trajectory for 2019 as well.

[Douglas Arthur:]

Yeah, does the growth in the mix of that number skewed toward the larger markets, I assume?

[Bob Dickey:]

It does. Yeah, we're seeing some really nice pops in markets like Milwaukee, Phoenix, Indianapolis, Nashville, so we're happy about that. We also have some of our small and midsized communities that are very tech-savvy like a Fort Collins, college university town, actually outperforms for a market its size in the number of digitals. But you're right, it is coming. The bigger numbers are coming from our larger markets, which is where we really put our focus.

[Douglas Arthur:]

Okay. Great, thank you. I'll jump back in queue.

[Bob Dickey:]

Thanks, Doug.

[Operator:]

Thank you. [Operator Instructions] And at this time, I'm showing no further questions. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.