Gray Media, Inc. (GTN) Q3 2021 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the Meredith Fiscal 2021 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Mike Lovell. Please go ahead.

Good morning, everyone, and thanks for joining the call. We will begin with comments from Chairman and Chief Executive Officer, Tom Harty; followed by Chief Financial Officer, Jason Frierott. Remarks this morning will include forward-looking statements, and actual results may differ from our forecasts. Reasons for the differences are described at the end of our news release that was issued earlier this morning and in our SEC filings. Certain financial measures that we are discussing on this call are expressed on a non-GAAP basis and have been adjusted to exclude the impact of special items. Reconciliations of these non-GAAP measures are included in our slide presentation. Our earnings release and slide presentation are available in the Investor Relations section of meredith.com. An archive of our prepared comments will be available on our website later today. And now, I'll turn the call over to Tom.

Thank you, Mike, and good morning. I hope you've had the chance to see our news release and our related slide presentation issued earlier this morning, which includes disclosures you'll find very useful. I'll start with Slide 3. Our digital advertising, licensing and digital consumer revenues continued to deliver record results. Our performance was driven in part by strong consumer traffic growth enabled by our data analytics and capabilities along with the flexibility that our digital platform offers. Mature media revenue performance was mixed as our Local Media Group delivered revenue growth beating our expectations, while our magazine-related businesses, which has a longer advertising sales cycle continue to be impacted by economic uncertainty. As we've previously discussed, we continue to pursue a two-pronged strategy. First, net debt reduction is our number one priority. We've made tangible progress on this goal with a $251 million repayment of our debt during the third quarter. We ended the quarter with net debt at $2.6 billion and had more than $230 million of cash in the bank. Second, we continued strengthening and enhancing our digital advertising and consumer-focused capabilities. We repeated a critical milestone in the third quarter as digital advertising revenues surpassed magazine for the second consecutive quarter, and our licensing and digital consumer businesses reached record highs. Meanwhile, consumer engagement remains strong as sessions to our National Media Group digital properties continue to expand. National Media Group consumer-related revenues account for 50% of the segment and we believe we have strong opportunities for growth ahead. With that, let's dive deeper into our performance for the quarter. Starting with the digital side of the National Media Group, our team delivered outstanding performance. Digital advertising revenues were $102 million, up 21% from the prior year period and a record high for a third quarter. Powering our digital business is our proprietary technology platform that brings together all of our content, our unique taxonomy, first-party data and our user graph. This platform provides a comprehensive view of the consumer and how they interact with our brands, content and products, providing valuable insights and predictive trends. This holistic view and our analytic capabilities provide us with deep insights into user behavior we use to drive advertising and performance marketing dollars as well as our own content and product development strategy. Our multiyear investment in our platform and data capabilities combined with the direct relationships we have with 150 million consumers who visit our sites each month is a competitive advantage and positions us well for a future in which third-party cookies will no longer be supported. Turning to our National Media Group magazine business. We spoke about a slow start to calendar year 2021 magazine advertising during our last quarterly earnings update in February. While that observation has proven true, we underestimated the volatility and uncertainty in the marketplace. In this uncertain environment, clients continue to be focused on bottom of the funnel-focused spending. In particular, we saw spending slowed from clients in the food and beverage and prescription drug categories from our fiscal second quarter and the travel and luxury categories remain challenged. However, we believe advertisers will return to branded advertising as the economy continues to rebound and more certainty returns. Magazine subscription revenues declined as we strategically shifted from agent sources and added more profitable direct-to-publisher subscribers. Newsstand revenues declined, which was expected as we published fewer titles in the quarter compared to the prior year and as the retail and airport channels remain challenged. Jason will go into some greater detail on circulation in a few moments. We plan to continue evolving and optimizing our magazine business based on advertising and consumer demand, keeping a keen eye on expenses as we have always done. Looking more closely at the broadcasting portfolio, we delivered 5% growth in non-political spot advertising revenues compared to the prior year period, driven by the professional services and home categories. It was our first quarter delivering non-political spot advertising revenue growth since the pandemic began. We also benefited from continued growth and retransmission revenues. While the macroeconomic backdrop is still uncertain, we are encouraged about our performance through the first nine months of fiscal 2021 and the opportunities we are pursuing for long-term growth, particularly in our digital consumer and advertising activities. With that overview, I'll now turn it over to Jason for a more detailed look at the numbers.

Thanks, Tom. I'll start on Slide 4. Looking at the third quarter of 2021 consolidated performance, revenues were $665 million, down 5% from the prior year period. As a reminder, we finished cycling through portfolio changes, so all comparisons today and going forward are on an apples-to-apples basis. Advertising-related revenues were $304 million, down 9% from the prior year period. As Tom said, National Media digital advertising was our strongest platform followed by Local Media non-political spot advertising. These gains are more than offset by advertising declines in our mature magazine channel. Consumer-related revenues were $339 million, down 2% from the prior year period. Growth in National Media licensing, performance marketing and Local Media retransmission revenues are more than offset by declines in magazine-related consumer revenues. Other revenue was $22 million, down 10% from the prior year period. This was primarily the result of sunsetting service agreements for sole brands and non-repeating project work. On a consolidated level, adjusted EBITDA declined 26% to $112 million from the prior year period. The lower adjusted EBITDA performance reflects lower magazine-related revenues, partially offset by strong growth in digital advertising, digital consumer and licensing revenues. Prior year adjusted EBITDA reflects benefits from employee expense-related actions taken at the start of the pandemic. Fiscal 2021 third quarter free cash flow was $68 million lower than the prior year period, primarily due to lower adjusted EBITDA. As a reminder, we sold Travel + Leisure trademark during the third quarter of fiscal 2021 for $100 million. We received the first payment of $35 million in the third quarter, which I'll note is captured in cash flows from investing activities and we've received the balance over the next three years. We continue to operate and recognize revenue related to travel and leisure and media platforms as part of a long-term royalty-free licensing relationship. Turning next to Page 5. National Media Group revenues were $465 million, down 8% from the prior year period. Advertising-related revenues were $206 million, down 12% from the prior year period impacted by magazine declines. Digital advertising grew 21% or $18 million surpassing magazine advertising for the second consecutive quarter. National Media Group consumer-related revenues were down 5% from the prior year period. We maintained a stable subscription rate base of $36 million. Subscription revenues were down 9% primarily due to our efforts to shift our subscription solicitation mix toward direct-to-publisher in a way from third-party agents. As a reminder, this strategy reduces revenue and increases profitability by fostering a stronger relationship with subscribers, including the opportunity for rate increases as subscribers renew over time. Newsstand revenues declined 20% as we published fewer titles in the third quarter compared to the prior year. Additionally, we have several exceptionally strong selling titles in the prior year period, including those memorializing L.A. Lakers basketball star, Kobe Bryant. Our licensing and digital consumer-driven revenues, which include performance marketing activities, such as e-commerce, lead generation and affiliate commerce continued to deliver strong growth up 31% in the quarter from the prior year period. Other revenues were $39 million down 19% from the prior year period, primarily the result of sunsetting service agreements for sole brands and non-repeating project work. Adjusted EBITDA was $67 million, down 35% as it was impacted primarily by lower magazine-related revenue and partially offset by strong digital revenue growth. Consistent with prior quarters, let me walk you through a few digital KPIs on the right side of the page. Digital sessions were up 17% from the prior year period. People.com delivered the strongest year-over-year traffic growth as it continues to benefit from strong interest in celebrity and human interest stories. People.com remains the number one destination in the entertainment category. We also delivered continued growth at Allrecipes, which remains the world's largest digital food site along with our home sites, including Southern Living and Martha Stewart. From a revenue mix standpoint, the majority of digital advertising continues to be sold directly by our sales team. We view this as a key differentiator highlighting advertiser demand for our powerful brands, premium content and first-party data, along with the flexibility that our digital platform offers. Looking at the bottom right of the page, our licensing and our performance marketing activities continue to gain traction led by relationships, including those with Apple, Amazon and Walmart. Turning to Slide 6. Local Media Group revenues were $201 million, up 3% from the prior year period. Revenue growth was led by retransmission and non-political spot advertising revenues, which were up 6% and 5% respectfully from the prior year period. Political advertising-related revenues were $5 million, down cyclically from the prior year period as expected and reflect Georgia's two U.S. Senate runoff races that finished in early January. These results include delivering nearly $1 million of digital political advertising revenues in the quarter captured in our P&Ls third-party sales line. Looking more closely at non-political spot advertising performance. The professional services category continues to benefit from strong engagement and now represents one quarter of non-political spot advertising, making it our largest category. We are seeing strong growth in the online gaming category, driven by sports betting. While online sports betting is presently legal in four of our 12 markets, there are currently legalization efforts in seven more of our remaining eight markets. We also saw some benefit from several high-profile sporting events broadcast on CBS. These gains were partially offset by lower spending in the entertainment and furnishing categories. Adjusted EBITDA grew 3% to $59 million from the prior year period, primarily driven by higher non-political spot advertising. Finally, we continue to ramp production based on our National Media brands. The PEOPLE show which we launched across all 12 markets last September remains the season's top new syndicated program. Television is a natural extension for the PEOPLE brand and the shows ratings are strong. We are working with Sony Pictures Television to syndicate the show to non-Meredith stations beginning in the fall of 2022 and believe its potential contribution could grow to the equivalent of a midsized television station. Turning to Slide 7. I am pleased to report tangible progress in net debt reduction, which is our number one priority. We paid down $251 million of our net debt since December 31, 2020. And our debt repayment is focused on unsecured notes, which is our highest price debt. As a company, one of our key performance measures is free cash flow. We generated $68 million of free cash flow in the third quarter compared to $100 million in the prior year period due to lower adjusted EBITDA. As a result of our cash and adjusted EBITDA performance, our leverage ratio on a reported basis was 4x adjusted EBITDA as of March 31, 2021. And we continue targeting a leverage ratio of 2x adjusted EBITDA over the long-term. Our revolving credit facility balance was zero at March 31 and continues to be unused. We aim to continue generating positive free cash flow in the fourth quarter of fiscal 2021. We ended the third quarter of 2021 with $231 million of cash in the bank, which includes the $35 million I mentioned previously from the sale of Travel + Leisure brand. Now I'll turn it back to Tom for closing thoughts on Slide 8.

Thanks, Jason. Our consumers today continue to focus on celebrity and entertainment news, house and home, food, style, health, fitness and parenting as well as news and information about the local communities. These fundamental lifestyle categories are Meredith’s cornerstone and even more relevant today because of the pandemic. Summarizing our priorities today, I want to leave you with four key thoughts. First, our number one priority is net debt reduction. We are making progress, having repaid $251 million during the third quarter of fiscal 2021. We reduced net debt by approximately $350 million so far in fiscal 2021. Second, we have built a digital advertising, licensing and digital consumer business of significant scale and we are excited about its growth and future prospects. This includes digital advertising revenues suppressing magazine advertising revenue for a second consecutive quarter along with another quarter of record performance for our licensing and digital consumer-driven activities. We attribute this success to several factors, including our powerful brands, which include PEOPLE, Allrecipes, Better Homes and Gardens and Southern Living. These brands are backed by a tremendous creative engine and collectively reached and engaged nearly 95% of American women, more women than any other media portfolio in the United States, investments in our National Media Group digital platform and our deep first-party data and analytics capabilities. Together these assets and capabilities are Meredith's differentiators and form the basis of our value proposition to advertisers and shareholders. They also position us to benefit from incremental advertising spend as the economy recovers. Third, magazines play an important role informing and inspiring consumers and they are an efficient and impactful solution for advertisers. Magazines play an important and profitable role with Meredith and we believe performance will improve as the economy continues to rebound, economic uncertainty recedes and marketers invest more dollars in branding and top-of-funnel consumer awareness strategies. Finally, we are encouraged by our year-over-year growth in non-political spot advertising. As we look into our fiscal 2021 fourth quarter compared to the prior year period, assuming no changes in trajectory due to COVID or other macro factors, we expect National Media Group digital advertising revenues up in the 70% range, magazine advertising revenues approximately flat and Local Media Group non-political spot advertising revenues to be up in the 40% range. I'm pleased to highlight that this forecast calls for the full-year fiscal 2021 National Media Group digital advertising revenues to surpass magazine for the first time in our history. This important milestone reflects our evolution as a dynamic media company with the proven ability to engage audiences across a diverse set of platforms. We will continue to manage our mature businesses for cash generation and profitability, while directing our diversified portfolio of brands and businesses towards areas of strong growth based on audience and client demand. In closing, we continue to be encouraged by the performance and future opportunities related to our digital business, including advertising, licensing and performance marketing along with broadcast-related performance through the first nine months of fiscal 2021. With that, we'll open it up the remaining time to your questions. Operator, can you please begin with the first question.

Thank you. [Operator Instructions] Our first question comes from the line of Dan Kurnos with The Benchmark Company. Your line is open.

Great. Thank you. Good morning. Tom, how are you? What a long way we've come to have a straight quarter like that and still be consented to EBITDA by $15 million. So I guess that the question is really two-fold, which is one, on the quarter itself and kudos to you guys obviously for managing your costs. But how much of it was potential outperformance at PEOPLE. Obviously, I think maybe this is the first week of the year where we didn't have the Royal on the headlines. Thank God. Not for you guys, unfortunately. But how do we think about the outperformance in PEOPLE probably in the quarter as a contributing factor relative to just the underlying improvement in the subscription base and the other cost savings you've done in light of the print number? And then on the print side, flat next quarter, you're getting back there. Magazine seems like a very safe place to advertise and TV is doing particularly well. So thanks for the color on bottom of funnel. Just curious on sort of how you view print now getting back towards the – they grow next year, getting back towards whatever you think the normalized level is?

Yes. Thanks. Dan. So first of all, we are very pleased with the quarter. I think we – for the company as a whole and also for the National Media Group, and as to your point, we over-delivered from a consensus basis on the bottom line. And really what’s driving most of that outperformance is that our digital. We've talked about this on our comments that we've reached that inflection point with our digital business is bigger than our magazine business. And we're seeing outsized performance in the digital area. Now we are a little disappointed from an advertising perspective on the magazine side, it's not unexpected. And there are a couple of factors that go into that, right. So last year because we've talked about this on a lot of calls over the years, that magazines have a long lead time from an advertiser commitment standpoint, it's almost two months. So when you – now we're in a period right now where we feel like brighter days are ahead. But if you go back to the beginning of January, there was a lot of uncertainty and clients want to have flexibility. So the other part of it is, is that we're up against the tougher comp. So last year in our fiscal third quarter, print wasn't really affected at all related to the pandemic because of the long lead times where our TV business had – and our digital business had a slight increase. So we know clients want flexibility and in this uncertain times, magazines don't give all that flexibility. And as I said in my comments, the biggest part of it is that clients in these uncertain economic times are really focused on transactional spending related to – that went really as well with digital. At that point, bottom of the funnel, mix sale and magazines are a great branding environment for that. So as I look to the future – the answer to your question was, we believe that we will see improvement as the economy and the uncertainty kind of evaporates for their advertisers as we go through this calendar year. So we believe brighter days are ahead. PEOPLE as a whole, now when you look at the print portfolio, it's not one brand versus the other, it's basically across the whole portfolio we’re seeing this and actually – we're actually taking share. So the positive side is it's not our execution in our sales teams that were just kind of waiting for clients to make those longer term commitments. We're in touch with all of them. They're all talking very optimistically about the whole calendar year, but it's just been a lot slower to start from a print perspective.

Got it. Super helpful. And the guidance is excellent especially on digital even above our expectations. So you're seeing nice sequential improvement. I don't know if Catherine is there wants to comment on just some of the benefits you're seeing from the platform unification or the push towards video. But just any incremental color on sort of what's driving the increase traction would be helpful.

Great. Catherine, do you want to take that?

Yes. Sure. It's pretty much everything across the board that’s growing on the digital side of the business. So that's extremely positive. Of course, you have session growth, right. So that drives up open programmatic revenue. But it's not just session growth, it’s also TTM growth. We have our direct sole business up significantly and particularly in our big clients, our big retail clients who do deep data integrations with that. So our scale, our platform, the data and insights and taxonomy all allow us to deliver data – targeting with data and insights at scale. And they're coming back to us for that. Video was up as well and as was premium programmatic. So as you know, only 40% of our revenue comes from open. Our direct salesforce sells our premium programmatic pipes, and people are coming to us as well for that. And that's where they can get our first-party data. I think that's going to be increasingly important as third-party cookies just go away. Does that helpful?

Yes. Very helpful. Thank you. I'll leave you with Tom, if you care to comment at all on the unsubstantiated TV sale rumors as is always the fun topic, and especially in light of the fact that your NMG business looks like, it's very much on the path towards a growth trajectory at this point.

Yes. Thanks. Dan. Obviously, we get this question many, many times before. And listen, as part of our strategic process, the Management Team and our Board, multiple times a year, we sit down and talk about strategically how we enhance shareholder value. And as we've talked about in the past, there's a lot of questions around, is the Local Media Group and the National Media Group, do they need to be together and is there shareholder value to be created if these businesses were separated. So again, we review this, we talk about it all the time. We get the question almost on every single quarter over the years. But we really, as a matter of policy, we don't make any public comments about our strategic process and our discussions with our Board about that decision.

This is not what I expected, but I have to try anyway since there are rumors out there. Thank you, Tom. Appreciate all the color everybody.

Thanks, Dan.

[Operator Instructions] Our next question comes from the line of Kyle Evans with Stephens. Your line is open.

Hi. Thanks. Follow-on for Catherine. If we look at the very strong session growth over the last two quarters, how sustainable is that? What are the drivers of that? What kind of control do you have there? It seems to be the outsized contributor to the digital strength. I'm just trying to get a sense for what that could look like for the rest of the calendar year as maybe people go back outside and messing around with the Internet as much as they have?

Yes. Well, a couple of things. One is, as I mentioned, our growth is driven by all of the channels that I talked about, not just by open programmatic, which is driven both by session growth, but also by TTM. So I don't want to underestimate the growth of TTM. In terms of sessions, well, I think it's all questionable about when everybody is back to the office and out and about, we've all been stuck in front of our computers for a long time. I don't expect our session growth to be up as strong as that opens up, but we still believe we are going to have and maintain our strong session. So there'll be some growth particularly in the categories that have been down, travel and leisure and some of our luxury properties. But I don't think the growth will be as strong, but we do believe there's still leverage in TTMs and the open category and all of our other revenue streams will continue to grow.

Great. And then is Patrick on the phone?

Patrick is on.

Hi, Kyle.

Hey, you knew I wasn’t going to let you get away. Maybe just some detail around your fiscal 4Q pacing and then maybe just any kind of core outlook that you can provide for the rest of calendar 2021. And then if you care to kind of throw down the gauntlet on political in 2022 versus 2020 on a calendar basis. Thanks.

All right. Well, taking them in order. Look, we gave guide on the fourth quarter for – plus 40 for the Local Media segment. But professional services continues to show strength in growth. I think you’ve heard Jason explained it earlier. It's now a full 25% of our local core advertising business and auto makes up about 20%. And we saw very modest growth for auto in Q3 at like plus 3. Look, as soon as these chips and rubber and foam shortages – right themselves and sort themselves out, I would say for the rest of the calendar year as that recovers so will the advertising piece behind auto. But we do continue to see strength in professional and home, and we don't look for those to abate. For political, I'm very excited about our 2022 cycle even against our amazing 2020 cycle. We have 13 Governor's races and 13 Senate seats. And you've heard me say this before. Even though we had a great Presidential run in 2020, the reality is a larger percentage of our political revenues come from those hotly contested Governor and Senate races. And we're going to have a full slate of those across our footprint. So I think what you'll see, it will be a record setting.

And then maybe just lastly, what have you, and then I'll get back in queue. Your subscription and network renewal timeline looking out over the last two years, whatever you can provide. Thanks.

Yes. I know, of course. Thank you for asking that. We have one affiliate relations renewal coming up for our NBC at the end of the year in Nashville. And then on retrain side with cable operators, we've got two large deals up at the end of the year with Cox and Comcast.

And that's calendar year Patrick, right?

Calendar year, correct, not fiscal. Thank you.

Thank you for clarifying that. Thank you, guys. Appreciate it.

Thanks, Kyle.

There are no further questions at this time. I’ll turn the call back over to Tom Harty.

Great. Well, we appreciate everyone's time and support, and we appreciate all of our employees that have delivered great results during a very difficult year. I'd like to just make one comment and say that, we're thinking about our colleagues. We have 350 colleagues in our India operation who are coping with the devastating outbreak of COVID. And we want you to know that you're all in our thoughts and your health and safety remain the top priority for us as it is for all of our employees in the U.S. So we feel brighter days are ahead for our employees and our business, and just want to thank all of our employees. So thank you for your attention. Have a great day.

That concludes today's conference call. Thank you for participating. You may now disconnect.