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Gannett Co Inc (NYSE:GCI)
Q1 2021 Earnings Call
May 7, 2021, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to the Gannett 1Q Earnings Call. [Operator Instructions]

I will now to turn the conference over to your host Trisha Gosser. Ms. Gosser, you may begin.

Trisha Gosser -- Senior Vice President-Finance And Investor Relations

Thank you, Alex. Good morning, everyone and thank you for joining our call today to discuss Gannett's first quarter 2021 results. Presenting on today's call will be Mike Reed, Chairman and Chief Executive Officer and Doug Horne, Chief Financial Officer. During this call, we will discuss Gannett's financial results for the quarter. If you navigate to the Gannett website, you will find that we have posted an earnings supplement in addition to our earlier press release. We will be referencing it today on the call as it provides you with additional detail on this quarter's performance. Before we begin, please let me remind you that this call is being recorded. In addition, statements made during this call with respect to future results and events are forward-looking statements that are based upon current expectations. Actual results and events could differ materially from those discussed today.

We encourage you to read the forward-looking statements disclaimer in the presentation as well as the risk factors described in Gannett's filings made with the SEC. In addition, we will be discussing some non-GAAP and pro forma financial information during the call today. You can find reconciliations of our non-GAAP measures to the most comparable GAAP measures in the earnings supplement. Lastly, I would like to remind you that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase any interest in Gannett. The webcast and audio cast are copyrighted material of Gannett and may not be duplicated, reproduced or rebroadcasted without our consent.

With that, I would like to turn the call over to Mike Reed, Gannett's Chairman and CEO.

Mike Reed -- Chief Executive Officer

Thanks, Trisha. Good morning, everyone. Thanks for joining us this morning on our earnings call. I'm very pleased to report that our first quarter highlights results in operations witnesses show significant progress against our stated strategy in almost all respects. First quarter financial results were ahead of internal expectations showing continued year-over-year growth and adjusted EBITDA and after normalizing for some structural changes in our year-over-year comparisons. We also produced a sequential improvement from Q4 to Q1 in same-store revenue and adjusted EBITDA trends. We're pleased to see that. March was our best month of the quarter, and we anticipate continued sequential trend improvement in Q2, as we start to cycle the largest impacts of the COVID-19 pandemic in 2020.

We expect to post a year-over-year total revenue growth of low to mid single digits in the second quarter, along with more than 30% adjusted EBITDA growth in the second quarter. And that is expected to lead to significant adjusted EBITDA growth for full year 2021 as compared to 2020 and that's we've mentioned that in our last couple calls, and we're a little bit ahead of pace so far under internal targets. Within the quarter, we also continue to improve the capital structure of the Company and we significantly lowered the cost of debt in the first quarter. For those that have been following the Company for a while now, we refinanced 11.5% term loan B with a LIBOR plus 700 term loan B during the quarter, and we also got shareholder approval for our converts issuance which we did in the Q4 time periods. And that was approved at the end of February in the first quarter and the converts have a rate of 6%. So, we have lowered our overall cost of capital from 11.5% about 7.17%.

Last point, I'll make on our financial statements and then Doug of course will go through them in much more detail. We're showing a loss of 142.3 million on our income statement and we need to put that in perspective given the financing moves that we made in the first quarter, which significantly lower our cash outflows. That's part of the convert steel before shareholders approve it. Accounting rules require the changes in the value of converts to the mark-to-market and run through the income statement because our share price went up significantly from the beginning of the year to the shareholder approval date. We had to take a non-cash charge of 126.6 million on the income statement. Now that shareholders have approved that deal we won't have mark-to-market changes running through the income statement any longer.

Also, in order to get the refinancing done, we incurred 19.4 million of non-cash charges related to extinguishment of debt. And in order to get all those deals done, we incurred 10.2 million in costs associated with those transactions. If you take those three charges into account, your net loss actually goes from 142.3 million to a net gain before taxes of 13.9 million, so a net gain of 13.9 million. Thought that was worth noting for shareholders since that net loss is such a big headline number. Now turning to operations, our digital subscribers surpassed 1.2 million in the quarter as a fantastic and again, it outperformed our internal expectations. We grew over 37% versus the prior year, and we had our single largest quarter for new paid digital subscribers adding over 120,000. Further our digital the ownership relation revenue grew by more than 45% year-over-year. Overall in Q1, our digital revenues accounted for approximately 30% of total revenue in print advertising was less than 25% of total revenue, making real progress toward our goal of being a digital technology company combined with having a revenue streams primarily made up of subscription revenues.

We are pleased with our execution on synergies as well going back to the acquisition of Gannett November of 2019. We've implemented a cumulative 300 million of annualize synergies. Now as of the end of the first quarter of this year, well ahead of our original goal of 300 million by the end of 2021. And we are confident in our ability to implement additional synergies by the end of 2021, resulting in a total of approximately 325 million or more of annualized synergies. When we spoke last on our Q4 earnings call in February, we outlined our commitment to a subscription led digital business strategy that drives audience growth and engagement by delivering deeper content experiences to our consumers while offering the products and marketing expertise our advertiser's desire. We delineated five key pillars to our strategy and I'd like to spend a few minutes updating you on the progress of each of those during the first quarter.

Our first pillar is accelerating digital subscriber growth. As I mentioned, digital only subscriptions surpassed 1.2 million in the quarter of 37% year-over-year. And importantly, we delivered our largest quarter-over-quarter growth as a combined company with 120,000 net new subscribers. Our markets responded well to new and more consistent subscription offers and enhanced high performing and localized creative as well as the marketing of highly valued and unique content. We anticipate that new subscription and product launches in the coming months will accelerate this growth on our path to reach a target of 10 million paid digital only subscriptions in the next five years. The second pillar is driving digital marketing services growth by engaging more clients in a recurring revenue relationship and aggressively expanding our digital marketing services business into our local markets, both domestically and internationally.

We continue to see progress with our localized to digital marketing platform. The platform enables subscription like opportunities through our core product set, which we expect to drive higher recurring revenue, more stable billing cycles, improved client retention, and stronger marketing performance for our clients. Our core sales team continued with year-over-year growth in revenue, returning to double-digit growth in the quarter, and achieving the highest productivity metrics since 2016. The significant growth and record productivity that our team drove in Q1 is a prime example of the superior results we believe we can drive for all local businesses. The third pillar is optimizing our traditional businesses across print, subscriptions and print advertising. We continue to drive the profitability of our traditional print operation through economies of scale, process improvements and optimizations. This includes maximizing the lifetime value of our print subscribers.

Through newly implemented retention and loyalty programs and expanding on the content we know our subscribers value most. Our print subscriber base has been quite stable over the past year. And while we do not expect to print subscriptions to grow over time, we are highly focused on retaining our current subscriber base. Fourth pillar is prioritizing investments into growth businesses that have significant potential and support for our vision. By leveraging our unique footprint, trusted brands, and media reach, we identify, test and invest in opportunities for growth. We highlighted a couple examples in the last quarter. And we have a couple of new great examples to talk about this quarter, but going back to the last quarter, we highlighted our USA Today network ventures, which is our events and promotions business. We've built this and continue to invest in. We're slowly returning to live events. We had a few in the first quarter.

And while our events adventures revenue, that activity was lighter than typical during the first quarter, it reflects an intentional delay of several events until later in the year when in-person events are anticipated to be more widely allowed and widely accepted. But I mentioned we have a couple of new areas to talk about that we're particularly excited about. They could represent very significant opportunity for us. The first is in the sports gaming sector. And we're exploring the sports gaming partnership that we actually expect to announce in the second quarter so very soon. Online game is a sector that is poised to grow substantially in the U.S. over the next 5 to 10 years, as it continues to legalize across the country at the state level. We believe we are well positioned to grow our business in tandem with this sector by leveraging our unparalleled ability to reach consumers at both the local and national level in the U.S. with deep community reach content and brands. Our sports readers are some of the most engaged audience and with our large network of dedicated and well known sports journalists.

We believe we offer access in local perspective that many of our national counterparts cannot and we plan to capitalize on that through a unique partnership. The second area we are exploring is leveraging our massive media archives to create non-fungible tokens or NFT's one of our most important assets is our content. We are excited about the NFT market because we believe it creates several new opportunities for Gannett. First represents a new way for consumers to enjoy an experienced Gannett's award winning coverage of historical events, monumental moments and areas of passion or special interest such as sports, turn event, the arts and pop culture. Second, presents a new business opportunity for Gannett, as we see how this space continues to develop, and how our incredible archives could be monetized in new marketplaces. We are excited about this opportunity and we'll be launching our first NFT in the upcoming weeks.

Finally, pillar number five, we are committed to building upon our inclusive and diverse culture to center around meaningful purpose, individual growth and customer focus. Inclusion, diversity and equity are core pillars of our organization. We have previously shared our inclusion goals for 2025. And we just published our first workforce diversity report in March, outlining the steps we're taking to reach those goals. During the quarter, we were also recognized for two awards that we are proud of. First, for the fourth year in a row, we received a score of 100 on the Human Rights Campaign Foundation's Corporate Equality Index. And for the second year in a row Gannett has been recognized as one of America's best employers for diversity by Forbes. Gannett is highly intent and focused on becoming a more inclusive, diverse and equitable workplace. And while we still have work to do, we are very proud to be recognized for the steps we are taking to get there.

With that, I'll turn it over to Doug for a more detailed discussion on our financial performance for the first quarter. Doug?

Doug Horne -- Chief Financial Officer

Thank you, Mike, and good morning, everybody. For Q1 total operating revenues were $777.1 billion, a decrease of 18.1% as compared to the prior quarter. On the same-store basis operating revenues decreased 16.5% as compared with the prior year quarter, due to the continued secular decline in print advertising and home delivery revenue, as well as the continued economic slowdown brought on by the pandemic. First quarter revenue trends were also impacted by the cessation of certain industry wide digital marketing incentives in 2020. The incentives generated through the Digital Marketing Solutions segment totaled $13 million for all of 2020 with $9.2 million of that in the first quarter last year. That negatively impacts the Q1 same-store trend by approximately 90 basis points.

So, on a comparable basis to Q1 2021, same-store trends improved slightly from the levels we saw in Q4 of last year. Adjusted EBITDA totaled $100.5 million in the quarter, which is up $1.4 million or 1.4% year-over-year. This performance reflects the impact of lower revenues offset by cost reductions and synergy savings. The adjusted EBITDA margin was 12.9% and growing 250 basis points over the prior year. In the first quarter, expenses were lower by 20.4%, reflecting permanent expense savings put in place in response to the pandemic, regular way cost reductions as well as the continued synergies from the merger integration.

Now moving on to our segments, the publishing segment revenue in the first quarter was $699.6 million. Print advertising revenue decreased 24.9% compared to the prior year on a same-store basis reflecting the continued sector of pressures as well as the disruption from the pandemic. However, print advertising revenue continues to show improvement each quarter, with 200 basis points of improvement in Q1 as compared with the Q4 trend. Digital advertising and marketing services revenues decreased 10.4% on the same-store basis reflecting the ongoing impact of the pandemic, as well as cycling against strong comparisons in the first quarter last year.

Digital media declined as compared to the prior year as we experienced record audience metrics in Q1 of 2020 tied to the onset of the pandemic, and Q1 2020 also benefited from certain large national digital media campaigns that did not recur in the current period. Additionally, we continue to see declines in digital classified, reflecting both secular trends, as well as the tough comparison against the prior year period, which still benefited from our historical relationship with cars.com. Digital marketing services revenue in the segment continue to show improvement year-over-year on the same-store basis, improving 460 basis points from the Q4 trends as a results of ARPU growth year-over-year.

Circulation revenues decreased 12.9% compared to the prior year on the same-store basis, which compares favorably with Q4 same-store trend of down 13.6%. Home Delivery trends declined slightly in the first quarter of 2021, reflecting the impact of more moderate pricing strategies. Single copy while still significantly impacted by the ongoing pressure on the pandemic, as a result of lower travel and consumer activity started to show improvement in year-over-year trends in the first quarter. Digital only subscribers grew 37.2% year-over-year on a pro forma basis for approximately 1,219,000 subscriptions. And the digital only subscriber revenue grew 46.3% on the same-store basis as compared with the prior year.

Adjusted EBITDA for the publishing segment total $102.2 million, representing a margin of 14.6% in the first quarter, an expansion of 170 basis points on a year-over-year basis. For the Digital marketing solutions segment, total revenue in the first quarter was $102.3 million, a decrease year-over-year of 12.7% on the same-store basis. The decline of 230 basis points from the Q4 trend can be attributed to the termination of the industry wide marketing incentive programs as I mentioned earlier, that was worth $9.2 million in Q1 of 2020. The otherwise improving trend quarter to quarter was driven by our core ReachLocal business where we saw double-digit growth year-over-year, with March yielding the best new client productivity month in over five years. Despite the strong performance metrics client count declined slightly quarter-over-quarter primarily driven by plant system conversions as plants are being migrated onto a single platform as well as the sunsetting of certain product offerings.

Long term we expect our core product set to drive higher recurring revenue and client retention while creating stronger performance for our clients. Adjusted EBITDA for the Digital Marketing Solutions segment totaled $9.2 million, representing a strong margin of 9% in the first quarter in line with our fourth quarter results, and well above margins in Q1 2020 of 6.5%. In terms of our Q1 net loss attributable to Gannett was $142.3 million, which reflects a $19.4 million noncash loss on the early extinguishment of debt in connection with our term loan refinancing and a $126.6 million noncash loss and the derivative associated with the 6% convertible notes due 2027. Noncash impact was driven by the increase in the fair value of the derivative liability as a result of the increase in a company's stock price from year-end levels. And as Mike mentioned, given the fact that we received shareholder approval in February of 2021, there will not be any future mark-to-market activity related to the convertible notes and our operating results.

Our net loss also reflected $58.1 million of depreciation and amortization. The Company's effective tax rate for the quarter was primarily driven by the impact of the derivative loss, which is not deductible from a tax perspective, partially offset by valuation allowances associated with deferred tax assets related to interest expense. Turning now to the balance sheet. As we outlined in our last earnings call, the Company has fully refinance our original 11.5% term loan earlier this year, putting our blended rate of debt outstanding at just over 7%. We ended the quarter with approximately $1.54 billion of total debt and made $41.2 million of debt repayments in the quarter including $8.6 million of repayments post by refinancing. These repayments were funded through cash on hand and $10.9 million of assets sales in the first quarter. We expect to generate an incremental $90 million to $115 billion of assets sales this year with the intention to reach firstly net leverage below one times adjusted EBITDA by the end of 2022. Our cash balance at the end of the quarter was $163.5 million, resulting in net debt of approximately $1.374 billion.

Capital expenditures totaled 7.6 million for the quarter reflecting investments related to digital product development, technology and operating infrastructure. From a cash perspective, please keep in mind that we will expect to make our first interest and principal payment on the new term loan on September 30th, and then we'll be making payments quarterly thereafter. Lastly, in connection with the CARES Act, subsequent to March 31, 2021, the Company has received approval for approximately $16.2 million in PPP funding in support of certain of our locations that were meaningfully affected by the COVID-19 pandemic. At the appropriate time, we intend to apply for forgiveness of the PPP loans in accordance with the program guidelines. As Mike indicated earlier, we are pleased that our Q1 performance and believe that we are well positioned for Q2 as well as the second half of 2021.

With that operator, you can now open the line for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question is from Doug Arthur with Huber Research. Please proceed with your question. Please proceed with your question

Doug Arthur -- Huber Research -- Analyst

Yeah, good morning. So 23.2 million in digital circulation revenues in Q1, so roughly 100 million annualized; A, if I do the quick math, it looks like your average, your ARPUs is around $6.50 monthly give or take. And Mike, I'm wondering if you've been just sort of expand on kind of what's this -- how do you execute the strategy on digital circulation? I mean, you have so many different markets, some are large, some are small, some are rural, some are urban. I mean, what's the game plan to really jack this number up?

Mike Reed -- Chief Executive Officer

Well, Dough, there's actually several initiatives that we are undertaking that over the next five years we believe will allow us to hit 10 million or more in paid digital subscribers. First of all, the 1.2 million we have today are all local. So this is, in those markets you're referencing, whether they're their cities or rural, and we are developing best practices right now. We've gone to more consistent metering which as mentioned, and we're going to develop best practices based on size and market geography, that will allow us to optimize the continued growth in those markets based.

First of all, on best practices for the wind the meter clicks, but also the type of content that goes behind the meter and the type of content consumers are actually demanding. So it's really a data driven approach, combined with the data will really drive our best practices to grow our local subscriptions. We also will, we are in the process of rolling out a paid strategy for the USA Today. And that is just in its infancy stages, and that we think will present significant upside to our current 1.2 million paid digital subscriber number. We also are implementing a paid digital strategy for our subscribers in the UK as part of our Newsquest business and that's the first thing as well.

And then finally, we are going to roll out paid subscription offerings for more category content and those things are in development, sports being one of the first ones we're focused on. So we see growth really coming from 1.2 million to 10 million over the next five years through higher penetration locally, everything driven by data, Doug, the higher penetration locally turning USA Today into a paid product digitally, growth in the UK and then growth in other specific category specific areas.

Doug Arthur -- Huber Research -- Analyst

I mean, obviously, it's early days, but if you look at the 1.2 million today, is it more concentrated in your larger markets than your smaller markets? Is that a fair description?

Mike Reed -- Chief Executive Officer

Yes, that's fair. That's across our top 50 markets is where the majority of that is. It's not our biggest. Biggest is not like the top five, it's not concentrated like that. It's more the top 50 or so markets.

Doug Arthur -- Huber Research -- Analyst

And then Doug, on just on the balance sheet, I think you mentioned 90 million do 115 million of potential asset sales still to come this year. In addition to that, in terms of the free cash flow for 2021, I mean, kind of what's your additional capacity you think looking ahead to pay off more debt from operations in 2021?

Doug Horne -- Chief Financial Officer

Yes, I think, given kind of our current outlook and kind of the both between the mandatory amortization that we'll start making in Q3, as well as kind of there's an excess cash sweep at the end of the year, in terms of all cash in excess of $100 million goes to amortization on the term loan. I think between those two things as well as the asset sales, we expect significant really significant debt pay down by the end of the year.

Doug Arthur -- Huber Research -- Analyst

Okay, great. Thank you.

Operator

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now turn the call over to Mike Reed for closing remarks.

Mike Reed -- Chief Executive Officer

Okay, thank you. And in closing, I'd like to reiterate the solid performance of the first quarter. As I mentioned at the onset, we did exceed our internal expectations and so we're ahead of our plan for the year. And we do expect our results for the year to be substantially better than 2020. We're also pleased with our first quarter results and then our ability to expand our EBITDA margins while also investing in our long-term subscription led digital strategy. This clearly defined that strategy with five pillars. And we believe that we'll transform or evolve our company over the next few years and create sustainable long-term revenue and cash flow growth. We are leveraging our unparalleled reach, trusted media positioning and long standing SMB relationships to drive our digital offerings and create growing recurring revenue streams with both consumers and businesses.

And we are already making executing on our strategy as demonstrated by our largest ever quarter for adding new digital subscriptions. With our restructured balance sheet and performance momentum, we're well positioned to create meaningful shareholder value 2021 and beyond. And we are highly optimistic that our new business opportunities in the sports gaming in the NFT space will create additional significant value for shareholders over the quarters and years to come. So, we're quite excited and quite optimistic. And we appreciate you joining us today and we look forward to updating you in three months on our Q2 earnings call. Thanks everybody. Have a great weekend.

Operator

[Operator Closing Remarks]

Duration: 31 minutes

Call participants:

Trisha Gosser -- Senior Vice President-Finance And Investor Relations

Mike Reed -- Chief Executive Officer

Doug Horne -- Chief Financial Officer

Doug Arthur -- Huber Research -- Analyst

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