Lee Enterprises, Incorporated (LEE) Earnings Call Transcript & Summary

Welcome to the Lee Enterprises 2025 First Quarter Webcast and Conference Call. The call is being recorded and will be available for replay at investors.lee.net. [Operator Instructions] A link to the live webcast can be found at investor.le.net. Now I'll turn the call over to your host, Jared Marks, Vice President, Finance.

Good morning. Thank you for joining us. In addition to myself, speaking on this morning's call are Kevin Mowbray, President and Chief Executive Officer; Tim Millage, Vice President, Chief Financial Officer and Treasurer; and Les Ottolenghi, Chief Transformation and Commercial Officer. Earlier today, we issued a news release with preliminary results for our first fiscal quarter of 2025. It is available at lee.net as well as major financial websites. Please also refer to our earnings presentation found at investors.lee.net, which includes supplemental information. As a reminder, this morning's discussion will include forward-looking statements based on our current expectations. These statements are subject to certain risks, trends and uncertainties that could cause actual results to differ materially. Such factors are described in this morning's news release and in our SEC filings. During the call, we refer to certain non-GAAP financial measures. Reconciliations to the relevant GAAP measures are included in the tables accompanying the release. And now to open the discussion is our President and Chief Executive Officer, Kevin Mowbray.

Thanks, Jared, and good morning, everyone. Our teams made great progress driving our digital transformation forward while continuing to serve our communities with trusted high-quality local journalism. In our last call, we shared how Lee has been leveraging artificial intelligence to enhance our digital transformation strategy. I'm excited to again have Les Ottolenghi, our Chief Transformation and Commercial Officer on the call today. Les will share more in a bit about how Lee is transforming how we engage with our customers, scale our advertising opportunities through the use of AI. Lee is consistently outpacing our industry peers in several important measures of digital growth, both digital subscriptions and digital agency revenue. Digital subscription revenue grew 46% annually over the last 3 years, nearly doubling the nearest industry peer. On the advertising side, Amplified Digital Agency revenue has significantly outpaced our nearest peers, growing 33% annually over the past 3 years. Total digital revenue was $302 million on a trailing 12-month basis, including $102 million within Amplified Digital Agency. Our first quarter digital revenue grew 5% year-over-year with each stream of digital revenue showing growth. Digital subscription revenue continued to lead our strong growth, growing 14% year-over-year. Our digital revenue is diverse and growing, and our first quarter results puts us in a position to take advantage of the AI partnerships we've recently made. And I'd like to pass the call over to Les.

Thanks, Kevin. Building on the momentum from our last earnings call, we've made significant advances in AI-driven personalization for our readers and AI business technology for our advertisers. For our readers and subscribers, we developed a next-generation AI personalization system powered by AI search and AI answer engine technology through our partnerships with Perplexity and AWS. This system enhances how users interact with our content and ensuring that these trusted journalism more relevant engaging and accessible than ever before. As part of this, we are testing a hyper-personalized consumer news experience, powered by AI and Lee's extensive news network. Currently, we are testing across our major news markets with expanded testing throughout the quarter. There's more to come in the next couple of quarters and early test results are promising with adoption rates already at 85% among engaged users, demonstrating a strong demand for AI-enhanced news experience. On the advertising side, we've launched [ SmartSearch ], an AI-powered website platform that transforms business pages into dynamic search and answer hubs. This technology provides businesses with a competitive advantage, increasing user engagement and time spent on their site by a factor of 5 to 1, compared to traditional specialized content websites. In addition, we're excited to announce the AI enablement program or AI Boost and new AI-powered advertising and automation solutions that generate high-quality content for our businesses. The AI Boost program will begin creating automated text-based advertising and marketing content, ensuring businesses maximize their visibility across the emerging AI search channels and traditional global web search. As we progress into 2025, this product will expand and will include automated podcast and video content creations, providing advertisers with a full suite of AI-driven content solutions to enhance their brand presence. Complementing this launch, we will introduce small and medium business AI advanced tools and resource center, which will include new AI-powered marketing tools and advertising automation solutions. To help businesses scale their digital presence more effectively there is more details to come, and that will be shared in the next quarter. At Lee Enterprises, we remain committed to leveraging AI to create value for our readers, advertisers and shareholders, driving both engagement and revenue and growth, more income for the next quarter as we continue our AI-driven expansion. Next, I'll pass the call over to Tim.

Thank you, Les. Digital revenue has grown more than 17% annually since FY '21, and that has translated to 13% annual growth in digital gross margin. Our digital margin is also an impressive 70%, meaning our digital businesses are highly profitable. Replacing upfront revenue with growing and profitable digital revenue will help us achieve long-term sustainability, and we see that on the horizon in the next year or 2. Speaking to the quarter's results, Total operating revenue in the first quarter was $145 million. Total digital revenue continued to show growth over the prior year, up 5% led by a 14% revenue growth in both digital subscription revenue and Amplified Digital revenue. As Les mentioned, it is still early days with our AI partnerships. However, we expect them to accelerate digital revenue growth in the last 3 quarters of FY '25, achieving our outlook of 7% to 10% growth year-over-year. Moving over to the cost side. Lee has a successful track record of effective cost management. We remain focused on operational excellence and driving margin in our legacy print business, however, our main priority to drive long-term sustainable digital revenue growth. Investments in AI will drive new revenue and maintaining our dominant position in the local market. As we've proven year after year, we expect our investments to be more than offset by cost saving efforts on the legacy side of our business. Continuing that track record we have identified $40 million in annual cost reductions that will be executed by the end of the second quarter. On the -- over to the balance sheet, our credit agreement with Berkshire Hathaway includes favorable terms, including a 20-year runway, a fixed interest rate and no financial performance covenants. These better-than-market terms allow us to stay laser-focused on executing our strategy. We also continue to identify opportunities to monetize our noncore assets which improves liquidity and facilitates accelerated debt repayment. In the first quarter, we closed over $5 million of asset sales and another $1 million deal has already been closed since December. We have identified an additional $25 million of noncore assets to monetize, and the monetization of these assets will provide a significant source of liquidity in 2025. As a reminder, Lee's Three Pillar Digital Growth Strategy is poised to achieve total digital revenue of more than $450 million by 2028. As Kevin mentioned earlier, our first quarter results were $302 million of annualized digital revenue, demonstrated we are well on our way to achieving our total digital revenue target. Achieving our long-term outlook will come from continued growth in the digital subscription revenue, Amplified Digital Agency revenue growth and new AI revenue opportunities. Looking at the full year, I'd like to remind everyone of our 2025 outlook for total digital revenue and adjusted EBITDA. We expect total digital revenue growth in the range of 7% to 10% and we expect adjusted EBITDA to grow in the low single digits. And with that, I will turn the call back to Kevin for closing comments.

I'd like to reiterate my gratitude to the entire Lee team for the progress we've made on our digital transformation, we're paving the way for Lee to lead the industry in this era of AI digital transformation. This concludes our remarks. The team will remain on the line for any questions you may have. Operator, please open the line for questions.

[Operator Instructions] And our first caller comes from the line of Daniel Harriman from Sidoti & Company.

Just a couple of ones, and I'll start with one for Les. Obviously, a lot going on with the AI, and I understand that you may not be able to share everything right now. But can you just talk about kind of the plans to monetize your AI library and any potential launches we could be looking for in your second fiscal quarter and then just any -- the value proposition that you may be providing to your advertising customers and conversations that you're having with them? And then my second question would be more for Tim and Kevin, and that's just -- if you could provide a little bit more information on the cost initiatives that you've identified for 2025 as well as your confidence in hitting the range of digital revenue growth that you provided along with EBITDA, understanding that the most recent quarter was a little bit challenging, but any information on that. And then as well, I didn't see it in the release and if I missed it, I'm sorry, but just how many digital subscribers did you end the quarter with?

Great, certainly. So with regards to our library of content, we're evaluating what is the highest return, obviously, that we can get for our corpus of information use and everything that is a core asset of the business. So we're taking all the right steps to analyze what is the best yield that we can possibly get and what are correct partners that will continue that opportunity into the future. We think there's a lot of yield in our content and, obviously, we want to get the most out of it. But right now, the closest proximity to revenue and opportunity is AI Boost. That's where our advertisers gain the benefit of the relationships we've already established with Perplexity, ProRata and being able to list their content in those search and answer engines so that they can establish their next best position in the digital marketplace. And as global search now transitions to the search and answer engines powered by AI, we're the first company getting there to provide that capability. So we feel very strong about the AI Boost program. And I think just in general, as we see lots of other changes moving into what is called the white space applications of AI and not just the large language models, we're really well positioned, better than anybody in the industry to take advantage of that more prudent that already with the test of our personalized news services.

I can jump into -- Dan, your question regarding our confidence in our outlook for FY 2025. You mentioned the cost side, I think that's one aspect that gives us confidence. I'd say, overall, there's 3 things that I'd point to that give us confidence in achieving our full year guidance. Number one, continuing to gain scale from our core digital businesses that's the Amplified, that's our digital-only subscription revenue, both of those revenue streams grew 14% year-over-year in the first quarter, our fastest growing revenue categories, they make up 36% of our revenue in the quarter and continuing to gain scale. On the unit side, you asked about units -- digital subscription units were up 8% and totaled 774,000. The second area item that gives us confidence in achieving our full year guidance is what Les just talked about is accelerating our growth due to the AI initiatives, specifically the AI Boost program and other programs, we think that has the opportunity to accelerate digital revenue growth in quarters 2 more than 3 and 4 as well that can help accelerate revenue trends. And then the last point is on the cost side. We've identified $40 million of costs -- annualized costs that we're evaluating and we expect to execute over the -- by the end of the second quarter. That's a number of things, including optimizing our print business and driving efficiencies through additional technologies like Agentic AI and others. So it gives you a little flavor as to how we're thinking about FY 2025 and why we have the confidence in achieving...

That was very helpful and best of luck in the coming quarter.

We have no questions on the web. I will turn it back to Kevin for closing remarks.

Well, thank you all for joining us this morning. We remain keenly focused on transforming our business for the long-term benefit of our shareholders, our employees, our readers and our advertisers. We appreciate your time this morning and your interest in Lee. Thanks again for joining the call.

Thank you. At this time, we have reached the end of our question-and-answer session. This concludes our call.