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Gannett Co Inc (GCI) Q3 2019 Earnings Call Transcript

By Motley Fool Transcribers - Nov 4, 2019 at 12:00PM

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GCI earnings call for the period ending September 30, 2019.

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Gannett Co Inc (GCI)
Q3 2019 Earnings Call
Nov 4, 2019, 10:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Ladies and gentlemen, thank you for standing by, and welcome to the Gannett Company Inc. Third Quarter 2019 Earnings Conference Call. [Operator Instructions] After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Stacy Cunningham, Vice President of Financial Planning and Investor Relations. Thank you. Please go ahead ma'am.

Stacy Cunningham -- Vice President of Financial Planning & Investor Relations

Thank you. Good morning everyone, and welcome to Gannett's third quarter 2019 earnings conference call. As a reminder, this call is being recorded and webcast. Joining us today from Gannett is Paul Bascobert, Chief Executive Officer and Ali Engel, Chief Financial Officer.

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 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 2018 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 posted to our Investor Relations website.

With these formalities out of the way, I'd now like to turn the call over to Paul.

Paul Bascobert -- President & Chief Executive Officer

Thanks, Stacy. Good morning, and thank you everyone for joining us today. Before I talk about third quarter results, I want to take a moment to say how honored I am to lead Gannett during this exciting new chapter. From the beginning, I was drawn to Gannett's mission to help our communities connect, act and thrive. I've always been passionate about this industry, and I share this Company's commitment to supporting and investing in quality, local journalism.

Next, I'd like to take a moment this morning to give a brief update on our pending merger with New Media, which is expected to close following our special shareholder meeting scheduled for November 14, assuming we receive the necessary shareholder approvals. The merger creates an exciting opportunity to deliver on our shared mission of journalistic excellence, or also driving compelling value for shareholders of both companies. Once the transaction closes, we will more than double our number of local markets, enhancing both our scale and our ability to monetize our technology and product investments.

The combined operations will have a broad, local to national network of incredibly talented, experienced journalists who can continue to deliver unique award-winning content for both local communities and national audiences. We'll have an even stronger digital marketing solutions portfolio to better service SMBs and help them grow their businesses, as we bring together New Media's UpCurve in our ReachLocal operations.

Importantly, as we look to the future, Gannett will continue to innovate around what we believe is our core competitive advantage, our local brands and our engaged local communities built over decades on the backs of outstanding journalism. While there's a lot of integration work ahead of us following close, we're excited about the future of Gannett, and we are confident our companies will be stronger together.

I'm now going to briefly touch on the important highlights from the third quarter, and then I'm going to turn it over to Ali to conclude with our detailed financial results.

In Q3, we delivered our best same-store revenue of the year and held adjusted EBITDA margins flat year-over-year. Within our B2B business, we saw improved trends in our digital advertising and marketing services revenue and print advertising revenues. And digital now makes up 53% of our total advertising and marketing services revenues. In our consumer operations, we continue to see nice growth in our paid digital-only subscribers and revenue. These results are good signs of the progress we continue to make in our ongoing digital transformation.

Turning briefly to the Publishing Segment, domestic print advertising continued to decline, although trends remained steady as they have all year, while we've got some upside from Brexit-related spending in the UK. Circulation revenues have also remained consistent all year. Our paid digital-only subscribers reached 607,000 in the quarter, in part driven by the expansion across additional markets of a hybrid pricing model, that put some premium content behind the paywall.

Digital advertising and marketing services revenue in the Publishing segment showed slower declines in the quarter, although declines in local digital media and classified businesses continued to weigh in the overall category. National digital media, including USA TODAY, local domestic digital marketing services and Newsquest all showed solid growth in the quarter.

At our ReachLocal segment, we reported sequential growth in both revenues and adjusted EBITDA margins in the quarter. That said, year-over-year trends were down, reflecting the sale of certain international operations and lower client counts in ReachLocal core markets, where we don't have a local media presence. The lower client counts continue to reflect churn from some larger accounts and slower new client acquisition activity.

Looking at our digital audience trends in the quarter, our monthly unique visitors as measured by comScore averaged 127 million in the quarter, up 4% year-over-year, and in line with peer groups. We saw strong growth from our comScore mobile web uniques, which increased 10% year-over-year and continued growth of 7% in mobile web page views. Additional -- additionally, video views and revenues maintained a steady growth in the quarter with revenues up 20% and views up 37%.

Finally, we continue to manage our operations as efficiently as possible, so that we can continue to invest in growth areas and maintain our journalistic excellence, while also driving overall returns to shareholders. I'm pleased with the cost performance in the quarter as teams across the Company continued to find ways for us to operate the business more efficiently.

As this may be our last call together, I'd also like to thank all of you for your support and thoughtful challenges over the years, as we worked to deliver the very best outcomes for shareholders. I would also like to thank the management team here at Gannett who have fought tirelessly, particularly over the last year to position this Company for a better future. And finally, as a reminder, this Tuesday is Election Day in communities across this country. As an organization committed to rights provided by a free and open society, I would like to encourage all of you to do your civic duty and vote.

And with that, let me turn it over to Ali.

Alison Engel -- Chief Financial Officer and Treasurer

Thank you, Paul and good morning everyone. Consolidated revenues in the third quarter were $636 million compared to $712 million a year-ago. The revenue decline reflects continued weakness in both print advertising and circulation revenues, partially offset by growth at WordStream, digital-only subscription revenue, and local digital marketing services revenues.

Additionally, the third quarter had one fewer Sunday, offset by one additional Monday compared to a year ago, which negatively impacted revenue by $6.4 million. On a same-store basis, total revenues declined 7.8%, a 200 basis point improvement over second quarter results, reflecting the addition of WordStream to the same-store calculation and moderate improvement in local digital advertising and marketing services trends.

Total digital revenues of $244 million, represented 38% of total revenue, up from 37% a year ago. Adjusted EBITDA totaled $62.2 million in the quarter, down 11% versus the prior-year quarter, reflecting lower revenues, offset in part by strong expense management. Despite the continued revenue pressures, adjusted EBITDA margins were flat to the prior year at 9.8%.

Total third quarter same-store operating expenses declined approximately 8%, reflecting payroll savings from various cost reduction initiatives, significant newsprint savings from both lower volumes and prices, and continued production and distribution efficiencies.

Turning to the Publishing segment, third quarter revenues were down 9.1% on a same-store basis, an 80 basis point improvement over second quarter trends, reflecting improvement within advertising and marketing services, as well as other revenue due to strong digital syndication revenue growth. Same-store digital advertising and marketing services revenues declined 3.7% year-over-year, an improvement over second quarter results, which were down 4.5%.

Digital marketing services revenues grew 11% year-over-year on a same-store basis, reflecting strong growth in our local markets and at Newsquest. The local growth of 6.6%, reflects both higher client counts and single-digit growth in average revenue per client. Client counts grew both year-over-year, as well as sequentially due to the positive impact of new sales initiatives and training efforts. We expect the favorable trends to continue throughout the fourth quarter.

Within digital media, revenues declined 2.5% on a same-store basis, unchanged from second quarter results, reflecting improved trends at local, offset by more modest growth at USA TODAY. Local benefited from strong video advertising revenue growth and the cycling of a prior-year rate reduction within local digital display.

USA TODAY digital media revenue showed continued solid gains, but the growth rate slowed modestly in the third quarter, reflecting some pullback and delayed spending from national advertisers, as well as continued desktop page view weakness. Newsquest digital media revenue remained robust, reflecting continued sell at national display advertising growth.

As we expected, digital classifieds revenue weakness continued in the third quarter. Within the auto channel, in early July, we renegotiated our agreement with, reflecting an early conversion of our affiliate markets into the direct sales channel. While the transition had a negative impact to revenue, it did not materially impact our overall third quarter adjusted EBITDA.

Turning to circulation, same-store revenues declined 5.8% year-over-year, relatively consistent with second quarter results. We continue to see declines in our full-access subscriber revenues, offset by incremental revenues from premium additions and strong growth in digital-only revenues. As we plan ahead for the fourth quarter, we would anticipate weaker circulation revenue trends for Gannett, as a stand-alone company, as we cycle our subscriber pricing initiatives implemented last year.

Paid digital-only subscriber volume growth remained robust in the quarter, up 27% year-over-year to approximately 607,000. Paid digital-only subscriber revenue grew 74% year-over-year, reflecting strong rate growth of 35%, as we continue to transition subscribers from low introductory rates to higher monthly rates.

During the third quarter, we introduced our hybrid pricing model across all markets, and so far the results are very positive with strong growth in volumes without a material impact on page views.

Turning to our ReachLocal segment, third quarter revenues totaled $101 million, an 8% decline versus the prior year, reflecting divested international operations. On a same-store basis, revenues grew 2.5% year-over-year, driven by growth from WordStream and our local markets, both of which benefited from gains in total client counts and average revenue per client.

Adjusted EBITDA for the ReachLocal segment was $13 million or 12.6% margin, both representing sequential improvements from the second quarter. On a year-over-year basis, margins declined by about 300 basis points, reflecting the core North America revenue weakness and margin pressure, due to gross margin erosion with larger clients and more aggressive retention efforts, and a one-time accounting benefit from last year.

Our GAAP net income for the quarter was $11 million, down from $13 million a year ago, reflecting higher non-operating pension expense year-over-year.

Turning to the balance sheet, we ended the quarter with $293 million of debt, including the $173 million liability portion of our convertible debt, and $123 million -- $120 million drawn on our revolver. Our cash balance was $101 million at the end of the quarter, resulting in net debt of $192 million.

Capital expenditures totaled $15 million for the third quarter, reflecting investments related to digital product developments, as well as projects supporting our ongoing facility consolidations and real estate transactions. There were no shares repurchased this quarter and we paid $18 million in dividends.

We expect the following for the full-year, assuming Gannett would remain a stand-alone company for the end of 2019; consolidated revenues of $2.61 billion to $2.63 billion as compared to $2.74 billion to $2.81 billion previously; consolidated adjusted EBITDA of $285 million to $295 million, consistent with our prior guidance; capital expenditures of $45 million to $50 million, excluding real estate projects; depreciation and amortization of $135 million to $140 million, excluding accelerated depreciation related to facility consolidations; the non-operating costs associated with our pension plans recorded in other non-operating items is currently estimated to be between $20 million $25 million as compared to a credit of $5 million in 2018; and finally, our non-GAAP effective tax rate of 28% to 30%.

That concludes our remarks for this morning. So with that, operator, please open the line for questions. Thank you.

Questions and Answers:


Thank you. [Operator Instructions] Our first question comes from Kyle Evans with Stephens. Your line is now open.

Kyle Evans -- Stephens Research -- Analyst

Hi, thanks. Good morning.

Alison Engel -- Chief Financial Officer and Treasurer

Good morning, Kyle.

Kyle Evans -- Stephens Research -- Analyst

I guess, I'll start with kind of cost cutting. This has been a cost-cutting story for years now. You're about to do a deal that's got a pretty substantial cost synergy laid on top of it. Could you help us think about the long-term potential to continue taking cost out of the business, and how close you are to kind of hitting muscle and bone where you materially impact more products? I've got some follow-ups as well.

Alison Engel -- Chief Financial Officer and Treasurer

Yes. Hey, good morning, Kyle. Good to hear from you. I think that -- look, we've talked about this a lot of different times. And I think as a stand-alone company, as we've said, we're always looking for ways to cut cost and those projects do become more difficult, a little bit more of a long-tail all of them require advanced planning and we were thinking about that kind of over the summer, as we were starting to think about our budgets and what we would have to do as a stand-alone company, I think as we're looking to integrate with New Media, we have a lot of opportunities with respect to the manufacturing and distribution [Phonetic] process, potential facility consolidations, duplicative public company costs, and similar things that are driving our synergy-related work. I think both companies have core competencies in efficiently running their operations and doing integrations through acquisitions. So we both have those skill sets and combined, I think we can be very judicious and actually be very good at this process. Our focus include the hiring of AlixPartners and how they're helping us kick this off and WordStream that they're leading and I think that would be also enlightening for everyone on the call.

So I'll turn that over to Paul.

Paul Bascobert -- President & Chief Executive Officer

Yes, thanks. So we've -- we have engaged AlixPartners over the last several weeks. Both companies have been actively engaged in setting up work teams, looking through the detailed synergy estimates, getting a line of sight, and how we're actually going to achieve those. And at this point, we feel good about our ability to hit the numbers that we have articulated publicly. So I think the process is going well and everybody's pretty actively engaged.

Kyle Evans -- Stephens Research -- Analyst

Great. It wouldn't be a quarter, if I didn't ask you your volume numbers on circulation. Also just -- while we're talking about circulation, maybe some higher-level thoughts from Paul about print and delivery, hand delivery as a means for distribution. I'm sitting in Rock, Arkansas DMA#57 and there are some pretty radical changes going on here as it relates to print distribution. I'm just wondering what you think of that and how you could use that going forward?

Paul Bascobert -- President & Chief Executive Officer

Can you say a little bit more about what radical things are going on in Arkansas?

Kyle Evans -- Stephens Research -- Analyst

We're doing away with print, unless it's on Sundays.

Paul Bascobert -- President & Chief Executive Officer

Okay. In terms of just --

Alison Engel -- Chief Financial Officer and Treasurer

About frequency.

Paul Bascobert -- President & Chief Executive Officer

Yes, frequency of reduction. Look, just in general, I would tell you that our print business is a healthy business. It generates a lot of cash flow and EBITDA to help power our journalism, to help power our products, and so as long as that continues, we're going to continue to push our business forward. We're always looking at frequency of delivery and looking at the trade-offs between the advertising and circulation revenue. We're going to keep looking at that, it's a moving target in terms of just the number of people and the cost to deliver. And so, you can expect us to keep revisiting that, but no specific plans at this point to change frequency. So I'll just leave it at that.

Alison Engel -- Chief Financial Officer and Treasurer

Maribel, if you want to...?

Maribel Wadsworth -- President, USA TODAY NETWORK & Publisher of USA TODAY

Sure. Hi, Kyle. And thank you always for your good [Phonetic] questions, we appreciate it. The -- you asked about volumes. We continue to see our volume decline as expected in the high-teens to low 20% range. And of course, some declines in our overall full-access subscription revenue, which is tied to the cycling of the pricing actions that we started last year, and we'll continue to see that -- we've mentioned in the past, we began to moderate some of our pricing. We're going to continue with that plan going forward. So we expect to see continued moderation of our overall revenues.

Kyle Evans -- Stephens Research -- Analyst

Great, one last one, and maybe this is one for after the call, and if you want to hit the delay button on it, that's fine. But I was interested in where video sits as a percent of overall digital advertising, and kind of what the views were there to create more video content given the much higher effective CPMs that you have in video over display in desktop and mobile settings? Thanks.

Alison Engel -- Chief Financial Officer and Treasurer

Yes, we'll have to get the specific percentage for you, but I mean certainly video is an area that we have focused on and are seeing strong views there. We continue to report those to -- give those numbers to you guys. Maribel maybe can speak to some of the things that we're specifically giving on the content side [Speech Overlap].

Maribel Wadsworth -- President, USA TODAY NETWORK & Publisher of USA TODAY

Yes. I mean, we definitely have put a focus on creating more video content, and that's been both for on-platform distribution and you're absolutely right, of course, the effect of CPMs there being considerably higher, and something that we see strong demand from advertisers to specifically wanting to associate with video content. And we've also focused on off-platform distribution. You've seen our syndication revenue continue to grow in strong double-digits year-over-year. As a result, a lot of that specifically tied to video. So we'll follow up with the exact percentages as a percentage of total advertising after this call.

Kyle Evans -- Stephens Research -- Analyst

Great, thank you.


[Operator Instructions] Our next question comes from Doug Arthur with Huber Research. Your line is now open.

Douglas Arthur -- Huber Research Company -- Analyst

Yes, thanks. Three questions. First on the $244.3 million total digital, I think you and I've been through this a few times, that's net of inter-segment, right?

Alison Engel -- Chief Financial Officer and Treasurer


Douglas Arthur -- Huber Research Company -- Analyst

So if that's -- if it's net, that implies that the digital revenue associated with Publishing outside of the digital media revenues you break out, and ReachLocal was about $61 million, that seems like an uptick from the Q1 and Q2 run rate.

Alison Engel -- Chief Financial Officer and Treasurer

Yes, we had a stronger quarter for digital marketing services, as we highlighted on the call. So we saw 11% growth in DMS, which was a trend reversal from what we've seen in the second quarter.

Douglas Arthur -- Huber Research Company -- Analyst

Yes, no, I'm netting -- to get to $244 million, I'm looking at the -- I guess, it's really the digital circulation revenue number specifically associated with Publishing outside of digital advertising. So that -- so, in other words to get to the $244 million, that number you talked about the strong digital sub-number, looks better than in the first two quarters. I don't know if that's true or if I'm doing the numbers correctly, or we can take it up afterward?

Alison Engel -- Chief Financial Officer and Treasurer

Yes, we can take it up offline. I mean, the other thing that is in there, as Maribel alluded to, is digital syndication, which has been a strong growth story for us as well. We do continue to see very strong digital-only circulation growth. But I think Doug, as we've discussed, I mean there is the allocated portion of our full-access that does get included in this calculation, and I would say that trend has been consistent and that does weigh on this number, just given the full access numbers are down.

Douglas Arthur -- Huber Research Company -- Analyst

Okay, terrific. The second question, in getting to your adjusted EBITDA of $62.2 million, you have a item at the bottom call other items. Is that the $8.8 million total, is that number included in SG&A and cost of operating expenses?

Alison Engel -- Chief Financial Officer and Treasurer

That's probably mostly in SG&A. Most of that relates to M&A-related activities.

Douglas Arthur -- Huber Research Company -- Analyst

Okay. So that would be a back out of it mostly of SG&A? Okay, thank you. And then finally, Ali, you talked about newsprint down a lot. Can you put a percentage on that?

Alison Engel -- Chief Financial Officer and Treasurer

Yes, 30% in the quarter, 20% related to volume, and 10% pricing, Doug.

Douglas Arthur -- Huber Research Company -- Analyst

Wow. Okay. Thank you very much.

Alison Engel -- Chief Financial Officer and Treasurer

You're welcome.

Stacy Cunningham -- Vice President of Financial Planning & Investor Relations

Operator, are there any other questions?


[Operator Closing Remarks]

Duration: 25 minutes

Call participants:

Stacy Cunningham -- Vice President of Financial Planning & Investor Relations

Paul Bascobert -- President & Chief Executive Officer

Alison Engel -- Chief Financial Officer and Treasurer

Maribel Wadsworth -- President, USA TODAY NETWORK & Publisher of USA TODAY

Kyle Evans -- Stephens Research -- Analyst

Douglas Arthur -- Huber Research Company -- Analyst

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