USA TODAY Co., Inc. (TDAY) Earnings Call Transcript & Summary

Good afternoon, everyone. Welcome to Citi's Apps Economy Conference. I'm Jason Bazinet, I cover the Media and Internet sectors here at Citi. We have disclosures available to the right of the video player or under the Citi Disclosures tab if you're viewing this presentation via Citi Velocity. Very pleased today to have Michael Reed, Chairman and CEO of Gannett; and Doug Horne, CFO of Gannett. Gentlemen, welcome.

Hi Jason. Thanks for having us.

Of course. Of course.

Yes. Thank you.

Of course. For investors that do want to ask a question, if you do type it into the Q&A field in the presentation, it will get relayed to me or you can just e-mail me directly, I'm happy to read your question to Michael and Doug as appropriate. And I think what we're going to do is have Mr. Reed start off with a short presentation, and then we'll pivot over to the -- some Q&A that I'll lead. So Michael, hand it over to you.

Yes. Thanks, Jason. I thought a good jumping off point would just be to give everybody here today a little bit of a review of what it is, who we are and what our strategy is to maybe set the foundation for some of the metrics that -- as to where we stand right now as a company. So if we could flip the slide forward to probably the next few right there. So what -- we're one of the largest media companies in the United States. We have both the local and national business, and we have one of the largest media businesses in the U.K. as well. We are in the middle of a migration on 2 fronts, from an analog business to a digital business, and from a ad-supported business to a subscription-led business. We have 2 primary platforms that are driving our strategy and driving our growth in the future. One is our content platform, and that's driving our subscription business to consumers. And then we have a DMS platform. We call it the Local IQ platform that's really driving our B2B business. And in both of those, we are driving subscription or subscription-like revenues for the future, moving away from an ad-supported model, and of course, moving away from the analog business. We've had a lot of success over the last 12 months as we've executed on the strategy. Where we stand today, we have $1 billion of LTM digital revenues as of September 3, and those are growing pretty rapidly, so it's not anything to sneeze at. We have a real sizable digital business today that I think is being overlooked by The Street. We have more than 1.5 million digital-only subscribers. When we launched on this strategy a year ago, we had less than 1 million, so that continues to grow rapidly. It grew by more than 50% in this past year. We have 15,000 core digital marketing service customers on our platform. I'll talk a little bit more about that today. We have about $450 million of LTM EBITDA, too, so we're generating real cash using that cash to invest in our growth as well as to improve the balance sheet. Our DMS business is profitable. I know a lot of businesses investors look at out there on the DMS side are unprofitable, we're all banking on the future. Turning cash flow positive, we are already operating more than 10% EBITDA margins in that business. And as I mentioned, we're one of the largest media companies in the United States. We reach, on any given month, more than 150 million unique visitors to our websites in our apps across the country, and then another 30 million to 40 million each month in the U.K. So we're real sizable business, generally one of the top 5 media businesses in the country in terms of audience every month. However, we are the only one that has a very comprehensive local offering in hundreds of markets across the country. So a real transition underway. We're not in the early innings anymore as evidenced by more than $1 billion of digital revenue and the size of our digital subscriber base and our DMS business. So we're getting to the middle of the game, and then hopefully, in the next 12 to 18 months, approaching the late innings of the game in terms of the transformation. I just want to highlight our strategy real quick. If we could go to the next slide. This is something we put together about 1.5 years ago after Gannett and New Media merged back at the end of 2019, and this is what we're operating under. This is our manifesto, talks about our purpose and our vision. But most importantly is the second line here -- second row, which is our strategy. These are -- we call them our [ North Stars ], these are our operating pillars. Just running through those really quick. These haven't changed, they're not going to change. Number 1 is we're executing on a digital subscription strategy. As I mentioned, we've surpassed 1.5 million in the third quarter, and growth in 2021 is more than 50%. And we have some pretty lofty goals there, and so we're pretty excited about the prospects for this business. The second North Star, or second pillar, is our technology platform driving our digital marketing services business, our local IQ platform. We have a nice customer base in there now, good ARPU, great margins and huge upside. Just to give a little glimpse, so the potential upside. This is about a $19 billion spend in the U.S., the DMS business, and so our opportunity is tremendous. We have a little bit about $450 million of revenue today, so lots of upside as this -- as we penetrate further into the spend in the U.S. And this DMS spend in the U.S. is growing right now at about 9% per year, so that $19 billion will continue to grow. So it's a huge opportunity for us. Our third pillar is optimizing the analog business. It's still the nice cash flowing business that has a long tail to it and it's throwing off good cash flows, and we're using those cash flows to improve the balance sheet, pay down debt, invest in growth opportunities. And so we want to extend that to have as long as we can, and so we are doing everything we tend to optimize that business to keep the cash flows and to lessen the secular revenue declines that we experienced, although we will continue to experience secular revenue declines. It is still a good business, it's a very profitable business. And its useful cash flow, when you think about the whole scheme of our strategy in -- but as far as improving the capital structure, but more importantly, of growing our revenues, growing our top line. Number four North Star is our other category where we're leveraging our key strengths, key assets. Whether it's our market presence, our audience, our publications, it's really what we do to grow new revenue streams that leverage key strengths of the company, primarily our audience and our reach. Some examples of what's in this category is our Events business, which is a $65 million revenue business that we expect to grow post the pandemic. We have a business called Reviewed.com, which is very similar to other businesses out there you might be familiar with like The Wirecutter, The New York Times zones or Best Reviews that Tribune recently sold. We have a sports media group in here that has partnerships with the PGA, with NASCAR, with sports gaming company, and we have lots of hyperlocal sports content sites inside this category as well. So this is about $150 million revenue category and growing pretty rapidly overall from all these businesses, we're pretty excited about the prospects here. And then fifth and most important is our efforts around [ IDAD ] and to build an inclusive diverse workforce and culture that will really allow us to optimize the first 4 North Stars as well as return, and so that's one of the highest priorities in our company. So that's our North Stars, our pillars that we're operating under. It's our strategy. The impact on the company's performance in 2021 has been good. We feel very confident that we're on the right path. And so we're executing on this strategy, which is going to, we believe, translate into sustainable long-term revenue growth, customer growth, cash flow growth in the digital world, primarily subscription or subscription-like revenues. The other part of the value-enhancing opportunity with our company for our shareholders is the improvement in the capital structure and the repayment of debt, which we've been doing very rapidly. We've got about [ $1.4 ] billion of debt today, paid down from about $1.8 billion. We've improved the interest rate from 11.5% just over a year ago, we're now all in at about 5.8%. You can see our cash outflows on this page, and we expect those to decline by about 50% in 2022. So with the EBITDA of $450 million and $200 million or less of cash outflows, we're going to throw off significant free cash flow that's available for further debt repayment. Our goal really is to get our first new debt to 0, and our focus right now is repaying our Term Loan B, which is something that we're pretty optimistic about over the next, say, 24 to 36 months. So we expect to continue to accrete value for shareholders through the repayment of debt as well as accrete value for shareholders as we execute on our strategy and turning to a subscription digital growth company versus an analog ad-supported business. So we're pretty excited about all the various steps that can be seen going forward that will create value for shareholders. We feel like we're on the right path and we're not in the beginning anymore, which is also exciting. We're seeing real traction with everything we're doing, whether it's debt repayment or growth in our digital business and our customer base. We're continuing to throw off great cash flows that allow us to execute on all facets of the strategy. So we feel like there's great opportunity ahead and really a great opportunity for our shareholders going forward. So Jason, I'll turn it back to you to maybe get into some questions.

Okay. Cool. That's a great overview. I guess I would start maybe if you could -- when I sort of think of the -- your firm prior to the Gannett acquisition, there were certain elements of your strategy, and you just reviewed sort of your strategy as it exists now. And I'd just love to know what elements of the strategy would you say have been consistent pre-Gannett, post-Gannett? And which ones have sort of changed either because your assessment of the marketplace has changed or Gannett just brought different assets and capabilities to the new company? Maybe we can start there.

Yes. I think the -- what's changed is the notion of how important scale is to real sustainable long-term growth in the digital business. In the old company before we bought Gannett, we were doing a lot of great acquisitions, and they were driving near-term free cash flow growth because we had a lot of synergies and opportunities like that. But what we didn't have was the scale to really execute on a long-term digital growth strategy, both in the DMS business as well as in the Subscription business. So we determined that kind of in the last year before the Gannett acquisition, and that's what made the Gannett acquisition so attractive is it brought that scale to us. What hasn't changed though, what's consistent is the underlying notion that a digital subscription business and the digital marketing services business is where our growth lies, it's where our [ focus ] is. And that's on the back of local media properties that have been around for a couple of hundred years and it's on the back of great content, primarily local content that's actually unique [indiscernible] not to monetize.

Okay. Super helpful. So I think most investors probably look at your same-store sales is like the best sort of aggregate barometer of the efficacy of your strategy. And you guys have had a few quarters of positive same-store sales on sort of, I'll call them, easier COVID comps. But if your initiatives are successful, what do you think is a reasonable time frame to get to sustainable same-store sales? Is that 2 years down the road, 3 years down the road? Or is that further out than that?

No, it's actually probably about 2 years, Jason. You're actually going to see -- you're right about this year. We had some quarters where we did have same-store growth, but we're going to get some pretty easy comps [ COVID ]. What you're going to see, though, in 2022 is vastly improved same-store comps relative to what you saw in our business before COVID actually improved. Why is that? Primarily because we now have more than $1 billion of digital revenue that's growing. And we have, as I mentioned, $150 million of revenue coming from the North Star number 4, which is a growing revenue category. And we have a pretty stable commercial printing business which has a couple of hundred million dollars of revenue. So what you really have now is you're getting towards the end, as I said, the middle innings of the game, next 2 years late innings of the game where those businesses will be the dominant source of revenue in our analog print, advertising. In print circ will continue to be a smaller piece of the pie. So by the end of '23, we feel like we'll be in a position where the same-store revenues will show growth. But it's not a cliff, right? You're going to see improvements as we go over the next 2 years.

Okay. That's super helpful. So I'm just going to go from the aggregate top line trends just to -- just focus on circulation. The circulation same-store sales were declining sort of low double digit sort of in the beginning of '21, and you got it down to sort of high singles in the second and third quarter. Do you expect continued improvement in those same-store sales on the circ side, specifically?

We do. And there's 2 things in play there. But the single most important is inside the circulation same-store numbers is this growth in our digital subscriber base. And so that grew that, as I mentioned, that grew by more than 50%. So with over 1.5 million paid digital subscribers, that's now a $100 million revenue [indiscernible] category when we're growing rapidly. So it's making a meaningful contribution to overall same-store trends. We are also, as part of North Star number 3, highly focused on improving the performance of our print business and extending the tail through content, through customer service, through delivery, to pricing, all of those things. So there's 2 things at play here. One is continued digital growth, improving that overall same-store trend as well as moderating the declines in the legacy print business.

Okay. So maybe I'm going to dig down from circulation overall just on the digital subscriptions. And I think you have a goal to hit 10 million subs by 2026, I believe it is, versus the 1.5 million today? Is that right?

Yes. That's right.

Okay. And what -- how -- I mean, how do you view that 10 million figure? Is that like a stretch goal? Is it something like you feel like you have pretty good line of sight on? Are there analogs that you can point to from other players that have made a similar transition that people can use as a reference point? Any sort of color?

You know -- so a couple of things there, Jason. One is we had less than 1 million paid digital subscribers when we stated our goal to grow. And so with less than 1 million and aspirations for 10 million, I didn't really care if we get to 8 million or 9 million or 11 million or 12 million, it's fantastic growth versus less than 1 million. But for context, 2 things for context. One, The New York Times has stated a goal of 10 million, and we thought we are -- we have more audience than them, so why shouldn't our goal at least be what their's is, given we're bigger. And then second point of context is that our print had historically penetrated more than 10% in the market pretty these now kind of current digital days. And so with a 7%, 7.5% penetration on the digital side, we would be about 10 million in paid subscribers. So there was a bunch of things that went into the [indiscernible] making to arrive that number. I would say it's more -- at this point or at that point and even today, 10 million, is that the right number? I don't know. I hope it's 12 million or 13 million, or -- but it could be 8 million , but it's a lot more than the 1 million we had a year ago.

And who -- as you sort of look at the customers that are signing up for this in that 1.5 million, are there any sort of -- is there a -- is it a broad sort of array of demographics? Or are you starting to pick out certain pockets, either sports enthusiasts or younger consumers. Who is the typical consumer that's signing up?

The typical consumer signing up is still local. Just this past third quarter of this past year, launched a paid model for the USA Today. We launched our USA Today Sports Plus app, we launched a paid Crossword app, so there's lots of national plays that are going to influence our growth to 10 million over the next few years that aren't in that 1.5 million, so that's primarily local. It skews a little bit older. Not as old as our print customer, but 40-plus on the digital paid side. Our print -- average print reader is about 53, so we do get a little younger with our subscriber -- digital subscriber. But the opportunity for us is to be more broad-based in terms of the consumers we reach. And so that's a bit -- that's going to be a big part of our journey to 10 million, just reaching a broader segment of the audience than we do today.

And I think it's fairly obvious, but I'll just ask it. I mean I would think on the digital side, your marginal costs are dramatically lower, right? So you can end up with presumably much lower circulation revenue but generate the same amount of EBITDA. Do you have any sort of rules of thumb that investors should keep in mind as they're sort of thinking about migrating from circ revenue down to circ EBITDA to get some rough guideposts?

You know what we look -- Jason, we look at it more because so much of our cost infrastructure shared across all facets of the business, we -- and it's centralized, we really look at our overall EBITDA margins for the company, which today are in the low kind of 13-ish percent range, and we've given guidance that as we execute on our strategy over the next 5 years, we expect that margin to grow into the high teens. And so probably 500 basis points of margin improvement. But really, we share so much infrastructure on the cost side that we don't really look at or determine an EBITDA margin for circulation itself. As we become less exposed to print, our costs went down significantly because we don't have distribution. We don't have raw materials, we don't have production and so that will be a real win for us. But the price point for digital is a lot lower. So as you mentioned, the EBITDA should be pretty consistent because it's a trade-off, less revenue but a lot less cost. Though I think we're probably accelerating a little bit that migration away from print now because all of the -- most of the inflation pressure that we're seeing in this country, I think we're going to talk about that at some point today. But most of that inflation pressure we feel is on that -- exclusively on that analog print business, raw materials, distribution, stuff like that. So it booms us to move as quickly as we can away from that business.

Okay. And on the business that's less important to you, strategically on print advertising, you also had some pretty small declines on those easy comps the last couple of quarters. What do you think a reasonable number is that investors should pencil in as this transition occurs [ percent ] your sales?

Yes. We think secular decline in print advertising is around 15% per year.

Okay. Okay.

And we do think brick-and-mortar stores will continue to close across the country, I think we saw that today. I saw Macy's North Mall store closing. Best Fire -- I don't know Best Fire and Bed Bath & Beyond announced some store closings. I think you're going to -- as the migration to e-commerce curves, you're going to continue to see brick-and-mortar close, and that leads to secular decline in advertising in our print business.

It's been pretty interesting. When I look at the e-commerce trends, at least in the U.S., I'm just using the census data. It's -- we went through this pretty consistent growth in e-commerce as a percent of total retail. We went through the surge during COVID, but it sort of come back down. And it seems like we're just on the same old, steady, very gradual migration to e-commerce. Is that a fair characterization in terms of how you sort of see it unfolding? Yes?

That's exactly, yes. Very fair.

Okay. Okay. All right. How about digital ads within publishing? You've shown really robust growth. How -- what are the sort of underlying drivers that are underpinning that growth? Is it just as simple as just the dollars are shifting from analog to digital? Or are there other things under the hood like better pricing, some of the big digital players take up pricing, or greater impressions that are getting deeper engagement from consumers?

Yes. So a couple of things. But one -- the first one is the scale of the combined company. We now have a better offering from a national perspective. So with digital advertising is just under $400 million a year in revenue for us and half of that is national, half of that's local. And our national business is -- has grown 4 consecutive years, but really has shown stellar growth the last 2 years as we put these companies together. Our thesis of scale is going to drive revenue that's played out to be true. We're also seeing better pricing to go. CPMs for on the programmatic side have been strong, and that's, I think, a reflection of the audience that we deliver. It's a premium audience, right? So we've seen pricing on the programmatic side increase both locally and nationally, and then we've seen, with the total audience, real growth on the national side, that's been the real key strength in our numbers there. We're not banking on big -- of digital advertising being a big growth driver for us, though. Really, it's our DMS B2B platform that's going to drive future growth.

Okay. Can we dig into DMS a little bit? Maybe you can -- for someone that's maybe newer to Gannett, can you just sort of explain what a salesperson, what their pitch would be to a potential customer to sign up for your services, what the sales cycle is like, what the offering is, how -- Maybe just put a little meat on the bone for folks to understand?

Yes. There's definitely -- I don't know that I can do it justice in the time frame here. There are slides in our Investor decks on our website that show there's 40 or 50 products that we have for businesses. But what I would say, overall, it's to help businesses grow their customer base, retain top to their customer base, so find, convert and keep customers is the primary way to think about it. There's all different kinds of ways for businesses to reach the market and to look at what their peers are doing. We do all of that for them in our database and so -- on our platform. The real opportunity for us, though, Jason, is migrating into payments, e-commerce, CRM, that's where the real B2B kind of subscription-like revenue opportunities for us in the future lie, moving a little bit away from advertising agency-type model and into more of, really, a subscription model, so. Right now, our DMS business is growing at more than 20% per year. It's more, as I said, more than $450 million and has a great EBITDA margin. It's primarily a lead-gen business, super businesses that also not only helps to find leads but convert and then keep those customers, interact with those customers. And importantly, we know what the peers are doing, what's working, what's not working for the peers.

Are you finding your DMS customers are existing sort of advertising customers on, like, various Gannett properties? Or -- and you're just over migrating dollars away from sort of your legacy print business and digital business over to this? Or is it brand-new customers that you've never really had success engaging with in generating revenue from?

Yes, it's the latter. It's mostly new customers we've never been successful in engaging. And the way to think about it, the easiest way to think about it is most of our customers are service providers, which didn't engage with the newspaper, they engaged with the phone book. So home service providers, professional service providers, those are all new customers for us. Customers that we have in this business that have migrated some from the newspaper side is the large higher education institutions, health care, house [ keepers ] and the auto -- the auto dealers. So there are a few categories that have migrated all the way from print into digital, and what we've really seen is our spend with those guys has been able to grow, hence our ARPU is growing because we're -- we're doing an even better job that's more attractable for them on the print ad.

I was going to ask, it seems like most of the recent growth has really come from ARPU lift as opposed to subscriber growth. Do you think that trend continues? Or do you expect a more balanced source of growth in terms of new customers and/or going forward?

We do expect to grow customers. And what's a little bit misleading about our 15,000 customer number is the core customers of 15,000 today, if we went back to the year, was only 13,000. So we've actually had good growth. What we had, though, as we formulated our strategy going forward, there's a customer -- segment of customers we've migrated away from because the revenues were too volatile, and there was no EBITDA.

Oh interesting.

So there was about 2,000 customers we've moved away from. So we've actually grown our core customer base by about 2,000 or more than 10% over the last year. So we do expect the customer base to grow. I expect, Jason, though, as we migrate to more of a agility self platform with payments and e-commerce and things like that, that our ARPU will actually come down a little bit.