USA TODAY Co., Inc. (TDAY) Q1 2017 Earnings Report, Transcript and Summary

Good morning. My name is Liz and I will be your conference facilitator. I would like to welcome everyone to Gannett's First Quarter 2017 Earnings Conference Call. This conference call is being recorded at the request of Gannett. Should you have any objections, you may disconnect at this time. All participants have been placed on mute to prevent any background noise. There will be a question-and-answer period after the speaker's remarks. [Operator Instructions]. Thank you. I will now turn the call over to your host, Mr. Michael Dickerson, Vice President of Investor Relations for Gannett. You may begin your conference.

Thank you, Liz and good morning, everyone. I'm Mike Dickerson, Vice President of Investor Relations and Real Estate at Gannett. Welcome to Gannett's conference call to discuss our first quarter 2017 financial results. Joining me this morning are Bob Dickey, our President and Chief Executive Officer, Ali Engel, our Chief Financial Officer, John Zidich, President of Domestic Publishing, Sharon Rowlands, Chief Executive Officer of ReachLocal and Barbara Wall, our Chief Legal Officer. Many of you have already seen a copy of our press release from this morning. For those of you who have not it is available on our website at gannett.com. I would like to call your attention to our Safe Harbor Provision for forward-looking statements that could be found at the end of our press release. The Safe Harbor Provision identifies risk factors that may cause actual results to differ materially from the content of our forward-looking statements. Our 2016 Annual Report on Form 10-K and other periodic filings on file with the SEC provide further detail about the risk factors related to our business. During this conference call, we may refer to adjusted EBITDA, adjusted earnings per share and free cash flow. We define adjusted EBITDA as earnings before income taxes, equity income, other non-operating items which includes interest income and interest expense among other items, severance-related charges, asset impairment charges, acquisition related expenses, transformation item, depreciation and amortization. We define adjusted earnings per share as EPS before tax affected severance-related charges, asset impairment charges, acquisition-related expenses and transformational items. The tax impact on these non-GAAP tax deductible adjustments is based on the estimated statutory tax rate for the United Kingdom of 20% and the United States of 38.7%. We define free cash flow as cash flow from operating activities less capital expenditures. These non-GAAP company defined measures are provided because management believes they are useful in analyzing the company's operating performance and cash flow before the impact of various reorganization and other charges. Reconciliations of adjusted EBITDA to GAAP net income, adjusted EPS to GAAP EPS and free cash flow to cash flow from operating activities are included is our press release. The format for today's call will be as follows. First, Bob Dickey will lead us off with a brief discussion and key update of our key strategic priorities. Sharon Rowlands will then discuss current events at ReachLocal. Ali Engel will then take us through the financial performance for the first quarter and our outlook for the full-year 2017. Lastly there will be a question-and-answer period. With that, I would now turn the call over to Bob.

Thanks Mike and good morning to everyone. We are pleased to report both revenues and adjusted EBITDA for the first quarter are ahead of consensus estimates. Overall revenue trends are somewhat lower than the fourth quarter, consistent with the expectations set when we provided our full-year 2017 outlook in March. That is that revenue and earnings comparisons to the prior year would be more challenged in the beginning of the year and improve in the second half of the year. As such, we have maintained our revenue guidance for the full-year and improved our adjusted EBITDA outlook, which Ali will go into in more detail in a bit. At Gannett we are thrilled that the U.S.A Today Network was recently recognized as a Pulitzer finalist in the investigative reporting categories for our Dishonor Roll series led by Steve Riley, Nick Tanzan Stabbler and John Kelly. Dishonor Roll chronicled the failure of the nationwide school systems to identify abusive teachers and prevent them from been hired by neighboring states. Dishonor was received in the first full-year duration of the U.S.A Today Network. This is the first time U.S.A Today has been recognized as a Pulitzer finalist in the investigated reporting category, and represents the first network wide investigative efforts that ran across all of our properties, on all of our platforms. It is exactly this type of investigated reporting and relevant journalism that makes a difference in the local communities we serve every day. Let me mention a few specific digital metrics that are helping convince advertisers to put their digital advertising dollars with the U.S.A. Today Network, which include not just U.S.A. Today, but our 109 local markets in the U.S. as well. During the first quarter two of the fastest growing components were digital and that being local U.S. market mobile and video were up a combined [indiscernible] compared to the first quarter of 2016. In March we experienced a 45% increase in video use in our local markets and achieved a record 25.8 million YouTube video plays. Also in March we published approximately 150 videos a day, an increase of 25% over the fourth quarter. We were pleased to see first quarter year-over-year same store revenue growth of 3.7% for U.S. local market digital advertising revenue. This is the second quarter in a row of growth, while this growth is not offsetting trend declines, it marks an important turn in trends for our local markets, where digital growth will be critical to the transformational success of the business. This trend appears to be continuing as we enter the second quarter. Also national digital advertising, which was very strong throughout 2016, was flattish on the same store basis in the first quarter, we're happy to report its back to double digit growth as we move through the second quarter. In March the company averaged more than 115 million unique digital visitors, an increase of about 5% sequentially from the fourth quarter of 2016. Our goal remains to be the number one source for news and information. [Technical difficulty] the U.S.A Today network again ranked number one in the news and information category, as measured by comps score, with nearly 80 million unique digital visitors. Digital online subscriptions excluding acquisitions were up 73% from the first quarter of '16 and 10% sequentially from the end of 2016. Overall, we ended the first quarter with approximately 250,000 digital only subscribers. Finally, News Quest in the U.K continues to make good progress transition its business to digital. Digital advertising revenues in the first quarter of 2017 were 26% of total advertising compared to 22% in the first quarter for 2016. Digital display revenues, that is without classifieds were up 18% year-over-year and their daily unique visitors were up 5% year-over-year. These strong digital performances are clear examples of the strength of the network model and we've only just begun to realize these benefits. With that let me turn the call over to Sharon who will discuss recent events at ReachLocal.

Thank you, Bob. We're pleased with our first quarter performance at ReachLocal with operating revenues of 77.6 million and adjusted EBITDA of 3.1 million. We experienced continue momentum in the North American market and strong growth in our Latin American market. Also during the quarter we accelerated the timetable for our launch into Gannett local markets and acquired SweetIQ. In North America we experienced a first quarter growth rate faster than fourth quarter of '16. A growth in the number of clients and continued uptick in the penetration of new products. The number of product units from our clients adopting the rich local Facebook solution doubled sequentially in the first quarter compared to fourth quarter of 2016. And our leave management software grew 39% year-over-year and 10% sequentially from the fourth quarter of '16. Our national brands channel grew 13% compared to the prior year first quarter, while increasing the number of client locations served by 11% over the same time period. The SweetIQ acquisition will continue to enhance our future product offering to the very important client segment. In North America we kicked off the migration of Gannett's digital marketing clients from the Jio Digital platform to ReachLocal. We also commenced the rollout of ReachLocal products into the local markets in the UK. This migration is ahead of schedule and anticipated to be largely in place by the end of the second quarter, bringing several efficiencies and improved profitability in the second half of the year. During the first quarter we ramped up spending for headcount and infrastructure to support this migration, unfavorably impacting profitability in the short-term, but we will realize greater growth and profitability in the second half of the year. In Latin America we recently partnered with a major newspaper in Brazil, with this partner ReachLocal will be the provider of digital services to their advertisers. This partnership has brought with it about 2,000 new clients. They have lower average revenue per unit than the historical ReachLocal business providing a great platform for up sale and growth. Latin America is still a relatively small portion of our overall business, but revenue grew sequentially 30% over the fourth quarter of 2016. Finally, we were very excited to announce the acquisition SweetIQ last week, further accelerating our innovation in providing the best digital marketing solutions to help local businesses achieve their goals. SweetIQ today powers over 250 brands in marketing agency, covering over 50,000 brick and mortar locations across the United States and Canada. This includes premium brands like Ikea, A&W, Lumber Liquidators, and WellStar Health Systems who use the SweetIQ platform to manage their online listing on major partners like Google, Yelp and Facebook. In today's digital landscape location management is a critical best practice to any brick and mortar business that wants to reach local customers online. In addition the ability to monitor and manage online reviews at scale can help businesses enhanced their reputation and set themselves apart from the competition. We see numerous synergies in SweetIQ including transitioning from our current provider to a more robust in house solution, selling SweetIQ into ReachLocal and Gannett's national multi locations clients and cross selling ReachLocal into SweetIQ clients. This acquisition not only enhances our solutions in this market segment but it also brings with it great technology along with the tremendously talented team that will enhance our business as a whole. As we head into the second quarter, our focus continues to be scaling up the migration of the net clients on to the ReachLocal platform, integrating SweetIQ and aggressive focus on growth in the national and multi-location segment. With that, I'd like to turn the call back over to Ali to discuss the financial results.

Thank you, Sharon and good morning, everyone. Operating revenues for the first quarter were $773.5 million compared to $659.4 million in the prior year first quarter, an increase of $114.1 million or 17.3%. Excluding $11.4 million of unfavorable foreign currency exchange rate changes and $1.8 million of selected exited operations, revenues increased to $127.2 million or 19.3%. The increase in revenue was primarily attributable to acquisitions partially offset by ongoing declines in print advertising and circulation demand. Consolidated adjusted EBITDA for the quarter was $69.7 million, compared to $80.4 million in the prior year first quarter. Adjusted EBITDA from the first quarter was unfavorably impacted by $3 million of foreign exchange rate changes as well as declines in print advertising revenues partially offset by growth in local's and digital advertising, the impact of contributions from acquired businesses and ongoing operating efficiencies. In the publishing segment operating revenues were $694.9 million, an increase of $36.9 million or 5.6% compared to the prior year first quarter. Excluding again $11.4 million of unfavorable foreign currency exchange rate changes and 1.8 million of selected exited operations revenues increased $50.1 million or 7.6%. This increase primarily reflects contributions from acquisitions and a 3.7% increase in digital advertising performance in local U.S. markets partially offset by a 17.7% reductions [technical difficulty] advertising. On a same-store basis, publishing segment operating revenues were down 10.7%. Publishing segment digital advertising revenues of $94.6 million were up 8.3% compared to the prior year first quarter due primarily to acquisitions, improved local performance in the U.S., including strong mobile growth. Excluding acquisitions and the impact of the 26.6% reduction in the employment category digital advertising revenues increased 2.3%. The increase was driven by a 39.2% increase in mobile display and a 14.3% increase in other sources of digital advertising revenues such as digital marketing services. Adjusted EBITDA for the quarter was $91.7 million compared to $97.5 million in the prior year first quarter, a decrease of $5.8 million including $3 million in unfavorable foreign currency exchange rate changes. Pressure from declines in print advertising and circulation revenues in the U.S. and U.K. were largely offset by contributions from acquired businesses, ongoing cost reductions and efficiency gains in operating expenses, and increases in local digital advertising revenues, particularly mobile display. In the ReachLocal Segment operating revenues for the first quarter were $77.6 million and adjusted EBITDA was $3.1 million. ReachLocal continues to perform in line with our expectations, showing continued growth in the number of clients, penetration of subscription project products and sales of its recently launched Facebook solution. As described in Gannett's press release dated April 20, 2017 the company acquired with SweetIQ which will be operated as part of ReachLocal's portfolio of products. In SweetIQ the first full year of operation we expect this acquisition to be modestly dilutive to earnings per share and neutral to earnings per share by the second full year. Net cash flow from operating activities for the quarter was approximately $31.1 million compared to $17.3 million in the first quarter of 2016. Capital expenditures were approximately $15 million, primarily for technology investments and real estate projects. During the first quarter, the company paid dividends of $18.2 million. The company did not repurchase any of its outstanding common stock during the first quarter. At the end of the first quarter of 2017, the company had a cash balance of $89.5 million and a balance on its revolving line of credit of $385 million, or net debt of $295.5 million. The company maintains its original revenues guidance for 2017 of $3.15 billion to $3.22 billion. Revised adjusted EBITDA guidance for the full year 2017 has increased to $355 million to $365 million, an increase of $30 million from the midpoint of the company original adjusted EBITDA guidance of $330 million. The $30 million increase is made up of the following components. $19 million for the full year impact of pension accounting change, $8 million for the first quarter operating over performance relative to expectations, $5 million for improved operating results for the balance of 2017 and a negative offset by a negative $2 million of adjusted EBITDA dilution from the acquisition of SweetIQ for the remainder of 2017. I would now like to turn the call back to the Operator who will assist us in taking some questions. Liz?

[Operator Instructions]. Our first question comes from the line of Alexia Quadrani with JP Morgan.

Good morning this is Paris Hiller [ph] on for Alexia Quadrani. We just had a quick question in terms of the corporate margin at ReachLocal. How do we think about the trajectory back to its historic margins, and could normalization occur in 2018 once Gannett lasts a full integration into its local markets? How do we think about that?

This is Bob. We expect to see rich local continue to improve its margin throughout '17 and into '18. We will -- as Sharon pointed out, as we start to integrate into the Gannett local markets that will have a positive impact as well as broadening the product portfolio with SweetIQ. Sharon, would you like to add anything else?

Yes thanks Bob. Essentially this is really about scaling and as we get the total business back to growth and take advantage of the Gannett footprint and thereby scale revenues, we really expect to get to that sort of like 10% EBITDA margin range fairly quickly.

Our next question comes from Doug Arthur with Hoover Research.

Yes Sharon, on ReachLocal, it is fair to say looking at what you reported a year ago that your revenues were essentially flat in year-over-year on a pro forma basis which would be significant improvement in trend. I know you illuminated a lot of products.

Yes, and scale back a number of the international markets. If you remembered that was a core part of getting back to profitability. But yes, you are correct, we actually did see growth in the North American business offset by a little bit of weakness in the European business. But we are definitely seeing an improved [indiscernible].

Is it fair to say you would, as your comps get easy, easier, you would hope to see some actual top line growth in the second half or you are not ready to go there yet?

I think given what we're seeing terms of our ability to leverage Gannett and the trends particularly in the North American business and our national multi locations business I would feel hopeful that we will see growth as we worked through the year.

Bob on the same-store add revenue growth for the newspapers, can you just clarify, you made some comments about Q1 trends versus Q4, and sort of what you are expecting to see in Q2, I just feel it's a little incomplete around trends. It looks like it was a bit down about 13% same store in Q1 is that right?

Yes, we are looking at, right now we are looking at Q2 to perform more in line with what we reported in Q4. Beginning of the year it was a little upwards and we've building throughout the first quarter and we're happy with what we're seeing in the second quarter. Some of that is we're seeing in the [indiscernible] business it was softer than expected in the first quarter. Some of which was the Easter shift that as you know number of major retailers had a difficult holiday season and were slow to start the year. Anything else you want to add John?

I think we are also moving into the heart of our Event business, which about 25% of our markets in the second quarter, our trends on revenues, they are above last year, so we're performing at a good clip there. We also think that we are seeing international digital business again, so I think between free prints [ph], events and improvement in national business we'll report as Bob said, more in line than what we saw at the end of the last year.

And yes Doug, the 13% was the correct number.

Okay, than finally Ali could you just go over those -- I kind of lost you there you made a number of -- towards your updated EBITDA guidance, you went through the pension adjustment. Can you just go through those four items again?

Absolutely. Pension is 19 million, and that's an accounting change, where we're moving pension expense, that's a full-year number, it was about 4.7 for the first quarter moving that from within EBITDA to below the lines. $8 million of first quarter operating over performance relative to expectations. $5 million for improved operating results for them the balance of the year, so Q2 through Q4, so 13 million total in improved operating performance and then offset by $2 million of negative EBITDA for SweetIQ acquisition.

And did you have -- I know there was a lot of foreign currency adjustments your pension liabilities, is there any update on that number in Q1?

It's a very small change, I think it's $17 million change for the quarter. I don’t have -- I looked at it this morning Doug, and I think went down by about 17 million, less than 20 million.

Okay, great. Thank you.

It was down to about $722 million.

Okay, great. Thank you very much.

Our next question comes from the line of Kyle Evans with Stephens.

Hi this is Tommy Drew for Kyle, I wanted to start on your paper, SERC [ph] down about 8% year-on-year for the quarter. Could you give us a breakdown in terms of subscriber count versus price increase there? And then also what kind of SERC assumptions are baked into the guide for the full-year please?

Yes, so first I just want to remind everyone that in the fourth quarter we had a re-class adjustments, so if Q4 would have been down 4% or 6% versus this quarter of 8%. And in Q4 we have some premium pricing related around holidays, particularly Thanksgiving, and so that is something that we're not cycling through in Q1. What we're doing is, this year we're looking at testing several new pricing approaches that we think will be more effective, and those tests -- that testing resulted in us pushing these pricing initiatives we thought we would start earlier in the year to later in the year, but we think they'll be more effective and that those results will be much more beneficial, but they won't start, we won't see some of those benefits until later in the second quarter, but most of those benefits coming in the last half of the year. Our home delivery volumes are very similar to the fourth quarter down in the 10% range year-over-year, the trend change is pretty much all rate driven which was closely to flat year-over-year in the quarter. So a lot going on in circulations as we are working very hard on this program with respect to pricing and hope to have some -- at least good news about what we expect in the second half of the year and hopefully seeing some results later in the first to second quarter to talk to you guys about next time.

Great thank you that’s helpful. And then my second and final question if I could, would you please give us an update on what the M&A landscape looks like both for print and digital?

Yes, I mean I will give a start and we have Bob chime in. We continue to have a robust pipeline of M&A activity. The team is very busy working exploring lots of alternative. I think one of the things we've talked about multiple times since the ReachLocal acquisition is doing, what we kind of tuck in acquisitions for ReachLocal to help them grow their products suite and provide more opportunities to up sell to their customers outside of just traditional search and round out their product portfolio in ways that they can do faster than developing products. SweetIQ is a perfect fit into that tuck in types acquisition and so we've done now one of those and we continue to look at lot of other opportunities in that realm. We continue to look at other more transformative digital acquisitions like ReachLocal, but don’t have anything, I think that is currently closed in that nature. We look at opportunistic local market acquisitions and always try to see what is out there for us, but I don’t believe we have many of those in the pipeline right now as there is just not a lot going on in that space. Bob do you want to add anything to that?

I think you covered it. Most of our focus right now would be more in the digital space that Ali pointing out to continue to push the ReachLocal integration into our company.

Our next question comes from Barry Lucas with Gabelli & Company.

Just had a curiosity, what allowed you to get into the Gannett's markets with ReachLocal earlier and what would the time table look like, if you planned to in all 100-odd local markets? What would be time table to be up and running?

I'll let John give you the background, but we were able to -- after the acquisition of Media Group [ph] we were able to use move ReachLocal into those markets. And once our agreement with Jio Digital expires in June, we'll be moving into the rest of the Gannett markets, I anticipate 100-plus markets being up by the end of the year, but I'll let John give you a little more color.

I think that the key to moving earlier was just a really good relationship with Jio, being able to wind down that piece of the business within our operation, while us winding it up was crucial for both of us, so we get into a really good plan working with Sharon's team to work through a conversion process that was both productive for our organization and minimize the impact on there.

Great thanks John, Ali if you could, if I look at sort of the trends in pound starling kind of leveling off in third quarter, is it fair to say that the FX impact will be roughly comparable may be 3 million again in the second quarter and perhaps a little bit less in the third?

If that's what you believe about those trends, than that would be true Berry. If I had my crystal ball, look we were hoping for stabilization and I think that would be productive for us. But it is what it is in terms of our ability to predict that, but if those assumptions were to hold true, that range is correct. I am showing no further questions in queue at this time. I would like to turn the call back to Mr. Dickerson for any closing remarks. End of Q&A:

Well thank you all very much for joining us today. That concludes our call. If you should have any further question you can reach me throughout the day at 703-854-6185. Thanks and have a good day.

Ladies and gentlemen thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.