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

Great. Well, we'd like to welcome Gannett's CEO, Mike Reed. Thank you for coming, Mike.

Thank you. Thanks for having me.

Of course. I guess to start, can you talk about your current overall strategy at Gannett and how it's evolved over the last 5 years?

Yes. So thinking about it over the last 5 years, obviously, going back 5 years, there was an analog to digital strategy in place. What's really evolved over the last 5 years is the understanding of the importance, first of all, of scale and of a broader content set in order to really achieve the growth you need in the digital space. And on the B2B side, the market presence to be able to penetrate a significant number of businesses. So the importance of scale and the importance of a broader reach across the country in terms of markets and a broader content set has been an important thing for us. That's what led New Media to acquire Gannett back in November of 2019. And what's really changed since then is the digital strategy has really gotten very specific. We understand where our growth opportunity is, where we have the right to win, and we're seeing results that reflect that. So we've developed a North Star or an operating pillar strategy that reflects specifically where the growth opportunity is. And so I'd say, at this point, over 5 years, what's really changed is we have scale and we have a very specific strategy that leverages our own platforms to grow, and it's working.

And you touched on it, but can you talk about the 5 pillars you laid out at the end of 2021?

Yes. So pillar number one is our digital subscription growth strategy, which we wanted to accelerate. We were able to last year. We grew at about 50% last year, year-over-year, ended with just over 1.6 million paid digital subscribers. We laid out a 5-year or 2025 plan with our last earnings call, which we expect to hit 6 million paid digital subscribers. And our aspirational goal beyond that is 10 million. So that's operating pillar number one. Number two is another huge growth opportunity for us, and that's our digital marketing solutions business, which we sell off of our local IQ platform. That's a $400-plus million business. So actually, we did $440 million last year, growing at double-digit percents. The addressable market there is about $20 billion. So our opportunity to grow that is really significant. North Star number three is part of how we pay for it. It's how we make the investments in growth, and that's optimizing this legacy print business we have, which is still highly profitable and with good margins. And so our plans there are, how do we manage the secular decline, which we're going to continue to experience in a way where we optimize the production and cash flow to continue to pay down debt and to fund our growth. And North Star number four is actually new business growth and what are the traits or characteristics or assets of the business that we own that set us up for growth in new areas that don't cannibalize the existing business and represent new customer growth and new revenue growth. We have several fun things going on there. We have a sports media group. We have an events business. We have review.com, which takes advantage of the e-commerce business, helping consumers review products. And we announced a partnership with a sports gaming company this past year. And so lots of new things going on there, and that's potentially a huge revenue builder for us in the future. And then finally, but not least importantly, is our focus on inclusion, diversity and equity and how that impacts the other 4 pillars. And that's been a high priority for us, and that's our fifth operating pillar.

Makes sense. And you laid out a long-term strategy to grow digital subscribers, getting from 1.6 or so now to the 10 million. Can you sort of lay out how you're going to attack that strategy? And can you talk about your digital growth to date a bit?

Yes. So the biggest opportunity -- the easiest thing to think about is our just increasing penetration. We have 150 million consumers visit our digital platform, unique visitors to our platforms every single month. So we have 1 million -- 1.6 million today that are paying. So the single biggest opportunity is to convert some of those folks to paying customers. The most -- and then from there, it's product extension, product enhancements and personalization of our content strategy. And that's basically utilization of data to make sure we understand what consumers engage with, what they're willing to pay for, what they spend time with, serving them more of that content. So they're engaged with us longer, develop an emotional connection with us and become a paying subscriber. So we -- but we have the 1.6 million paid digital subscribers, I mentioned, over -- about 95% of those are in our local markets today. So think about the penetration opportunity there is one part of this. Second part of this is new product launches. We just took USA TODAY to -- we introduced a premium facet to USA TODAY's strategy in the third quarter last year. We launched a paid crossword app in the third quarter last year. And so those types of extensions are other opportunities for us. And then finally, we own the second biggest business in the U.K. It's called Newsquest, and they're just now embarking on the paid strategy as well. So I think a combination of much further penetration based on data and improvement in our content strategy, product enhancements, making it a better experience for our consumers and then product extension, those are really the areas we see the path to 6 million and then 10 million.

That makes sense. And have you used discounting or bundling of products or partnerships to promote your products now? And can you speak to any LTV, the CAC ratios?

Yes. So we have used -- we've used discounting as one of our primary growth tools so far. You mentioned bundling and partnerships. Those are two opportunities for us to grow. We have opportunities with bundling. One, we just announced where paid digital subscribers have access to over 200 e-additions from our markets across the country as a bundled option for subscribing to one of our products. There are many more bundled opportunities that we're working on. And promotion or partnerships is another opportunity we're working on. We're in some discussions with other partners who could bring subscribers to us. So those are two kind of on-the-come ideas, but the bundling has been one of the primary -- I'm sorry, not bundling, the discounting has been one of the primary focuses for us so far to bring people in, get them engaged and then move their price up over time. Our -- we have a real advantage with CAC because we're already local and we cover news, so that naturally brings people to us. I mentioned we have 150 million people come to us every month. So our customer acquisition costs are much lower than a newer startup that might come into the market with no brand, no presence and introducing a new content -- new type of content. So our CAC -- our LTV to CAC is very healthy. We haven't publicly disclosed anything, and it is an evolving number because our digital subscription strategy is so new. But our customer acquisition costs, I'd say we have a real strategic advantage there because our products have been in the market. The brands have been in the market for more than 100 years, and we're known as the place to go for local news and information.

That makes sense. And so you rolled out the digital model of USA TODAY in the last 6 months or so. Can you discuss how that has been going? Are there any changes or enhancements you're going to make? And how are conversations with advertisers?

Yes. So we did -- we rolled it out in the third quarter last year. So we're 7 or 8 months into that. Our subscriber growth has exceeded expectations so far, although we haven't publicly stated anything. And as I mentioned, 95% of our current paid subscriber base is local, so it's not new set. So -- but we've outperformed what we thought we were going to do over the first 7 or 8 months. I would say we've taken a bit of a hybrid approach to this because our digital advertising platform in the USA TODAY was so strong. And we draw 60 million unique visitors to the USA TODAY every month. And off of that, we have a digital advertising base that's grown for consecutive years. So we're very aware of that. And while we believe the subscriber opportunity is tremendous and will create more value for shareholders in the long term than the advertising model, we're taking a hybrid approach to how we do that. And so what that really means is the amount of content we put as we mark as premium where you have to pay to get it is still relatively small in relationship to all of the content the USA TODAY produces. So what we're really trying to do is we're being conservative, trying to figure out what type of premium content actually works, what do consumers engage with and pay for, what doesn't work. And we're doing that in a way that's not disruptive to the total audience that's coming to us. And as we learn from what does generate subscriptions, we'll start to do more of that and shift more into premium and a little less away from free. So it's a bit of a hybrid approach. So we've been able to protect -- protect is probably not the right word, but we've been able to continue to monetize the audience through advertising while we slowly grow the subscriber base. So it's been a good experience so far. And I think we've exceeded our internal expectations so far.

And have you brought new advertisers into the fold that are interested in the product or...

We have, especially because you have a very -- we're collecting more and more data on our customers, and there's a registration process. And the more folks that go through the registration process, the better the data we have on the audience that we can then serve to advertisers. But also the USA TODAY, marketing the size of the audience that's coming and then being able to further market the type of audience, what that looks like has helped us bring new advertisers into the fold, mainly national, sometimes large regional advertisers.

That makes sense. And can you discuss some of the challenges you faced shifting to the digital strategy? And what have you learned from the adversity? And how can you apply it to avoid pitfalls and achieve the targets in the future?

Yes. So the challenges that I'd say -- the biggest challenge is culture. And that's a hard thing for a business that's as old as ours, that's been doing things a certain way for a long time, essentially a business that was a monopoly that's no longer a monopoly. So the cultural challenges are big, and you can't underestimate the importance of tackling those. I think another important learning is that on this journey to creating a sustainable long-term digital business, it's not a straight line. It's not a straight path, and there are a lot of bumps in the road. So you've got to really understand that it's a journey. It's more of a marathon than a sprint. And you can't waver when you hit those bumps. You have to make pivots when something you're doing is not working, of course. And we're making minor pivots all the time on things we want to do that just doesn't work, falls flat. You got to make a pivot. But your overall strategy, if it's working and you believe in it, you have to stick to it. And so another part of that, another learning of that is every decision you make in the company, big or small, has to be in line with that strategy, that growth strategy. Otherwise, you have cracks in the foundation, and your team sees it and people on the outside see it. So it's -- to me, the biggest learnings that we've had really are how do you overcome the cultural challenges, how do you align your team around goals that are important for the future and how do you make all of your decisions in line with that future and continue to be consistent in that over a longer period of time. I mean those are big learnings for us. So you have to take risk and you have to try new stuff and then you have to make pivots when it's not working, and you have to do that quickly.

Makes sense. And just one more on digital. How should we think about your overall digital growth going forward? What does profitability look like near term, medium term, long term?

Yes. So we -- 1/3 of our revenue today is digital. We did just over $3 billion of revenue last year in 2021, and we did $1 billion of digital revenue. So we're about 1/3 now. We grew at just over 10% last year. I think same-store was about 11% growth last year. And we see over the next, say, 3 years that digital subscriber growth, 3 to 5 years being digital -- or I'm sorry, subscript digital revenue being about 2/3 of total revenue with profitability attached to that. Our overall company margins today are around 12% to 13%. We see those margins growing by 300 to 500 basis points over that same period of time. So we do expect to have about 2/3 of our revenue digital to have EBITDA margins that are in the -- more in the mid- to high-teens from where we are today. It's hard -- it's still hard today to tie EBITDA margin directly to digital because so much of the infrastructure of the company is serving both masters. And so it's just -- you can just start playing with allocations and come up with whatever margin you want. So the most important one is to look at the overall margin of the company.

That makes sense. And switching gears, can you talk about the digital marketing solutions business? It's about $450 million revenue and double-digit profits. How large can that get from a revenue and EBITDA perspective? And what are your expectations over the next 1 to 5 years?

Yes. So I think the opportunity there is huge. I think, first of all, our right to win because we're already local. It gives us a significant advantage over other players in the market who may be national or international and don't have any local market presence and, therefore, have a much more -- a much higher customer acquisition costs and branding exercise to go through. So I think our opportunity is big, and I think we have the right to win. In the U.S., about $20 billion is spent on digital marketing solutions and there's 2 ways to look at that. There are about -- and I'm just going to say roughly half is medium-sized to larger businesses that spend about $10 billion, and that's mainly where we play today. So our $450 million is penetrating that piece of the $10 billion. There's another whole $10 billion-ish category for the small business, and that's where part of our big opportunity lies in the future. And so we're focused on growth really in 2 cohorts, continuing to grow in that medium- to large-sized business area where we're successful today and then to really develop our product experience for businesses to help us grow more in that small business space. And so that's a lot more freemium and DIY-type products to bring customers in. We've had a lot of success to date with our current offerings, though. And our customers tend to stay on average more than 2 years. And 25% of our local IQ DMS platform customers have actually integrated our platform with their content management system, which makes that much more sticky with us. And our ARPU has been growing over the last couple of years in that particular cohort. So a $20 billion opportunity, a 10% penetration across the company -- country is a $2 billion opportunity for us. We certainly covered more than 10% of the country with our presence today. We're in 40-plus states. And so in our penetration in the -- as I mentioned in the one cohort is like 4.5% today. So I don't know exactly what -- where the opportunity lies, but it's certainly significantly north of where we are today. And I think this is potentially a multibillion-dollar category over the long term.

Makes sense. And just so we get a clarification, who do you partner with? And can you talk about your conversations with clients who use the platform? And what's the pipeline to getting new clients on board?

Yes. So our main partners today are businesses kind of in that medium to large category. They spend anywhere from $12,000 a year to $250,000 a year. We have some larger clients who will spend up to $2 million, but that's generally where we're playing today. As I mentioned, our conversations with them have been good. I think the products that we're delivering them work, and that's reflected in the fact that our businesses stay with us for more than 2 years and 25% of them have actually integrated our platform into their content management system. So what we're doing, we're -- is working. We have the opportunity to continue to grow in that space through our current sales channels. We have our media sales staff. We have a digital marketing solutions-only sales staff, and we have inside sales staff. Inside sales staff is probably the fastest-growing one, funneling leads to that place. But the other opportunity then is the smaller business. And that's where our product expansion presents the biggest opportunity in that space, bringing customers in that aren't going to spend $25,000 a year but who, with significant volume, can be a great cohort for us. So that's more of on the come, where we play today. We have 15,000 customers that are basically generating $450 million of revenue. That 15,000 customer base is out of, we think, about 1 million to 1.2 million businesses that spend in that area that we are playing in. So our opportunity -- if we just double from 15,000 to 30,000 in that cohort, you go from $450 million to $900 million. But there are 31 million SMBs. So there's basically 30 million out there that are the smaller cohort, that used to use the yellow pages and phone book and stuff like that. And so that's where a significant volume opportunity exists for us.

And are you guys hiring behind that to go after that opportunity? Or is there going to be increased headcount?

Well, we are. The first thing we're doing is the hiring is in product because we have to build out the product. The product, though, will primarily be DIY. And so it will have call centers that can help people through things, so we'll expand the call centers. This small business opportunity for us, though, is not adding salespeople and going out and knocking on doors. The opportunity to add sales force, though, to the first cohort is there. And we're first trying to improve the efficiency of each of our sales reps to a point where we think we've maximized that before we add more. But the additions of staffing right now is more on the product side for the new opportunity in DMS.

Okay. That makes sense. And can you discuss how you optimize search, social and other platforms for clients using your first-party data? And what does pricing look like for advertising?

Yes. So we -- in our DMS business, we're pretty excited about our optimization product for small businesses, for medium-sized businesses. It's actually patent pending. And basically, we've built a proprietary bidding exchange that helps a business maximize its spend to create the most customers it can for the lowest cost per customer. And that bidding exchange goes across search, social, display and other platforms. We call it our cross-media optimization product. And as I mentioned, it's proprietary. We have patent pending on it, and we think it's a real differentiator for us. It gives us the right to win with not only our business customers today where it is working, but in the future. So that, to me, is how we think about how do we optimize for our customers, the ability for them to spend, get the lowest customer acquisition costs, get more leads than they thought and then see them grow that spend with us through this bidding exchange. Our ARPU right now with this customer base, I'm talking about pricing and stuff, is a little bit over $2,500 a month. And that's grown over the last couple of years. I can't remember where we were 2 years ago. I want to say $2,000, maybe a little bit over $2,000. So it's grown pretty significantly to over $2,500, probably about $2,600 as of the end of 2021.

Wow. Okay. That's great. And we touched on DIY. But what are the advantages of your technology and offering? And overall, can you talk about the future of digital marketing product? Do you see freemium DIY models becoming a larger portion of your users?

Yes. The latter part of that, yes. Freemium DIY will become a much larger portion of our customer base and eventually our revenue platform because that's where the most significant volume growth lies. I mean there are 30 million SMBs out there that aren't going to spend $250,000 a year. But they're still important customers for us that will spend something and that we can help them grow and grow that part of our business significantly. So that's a big opportunity for us. On the technology side, I'd say our patent-pending proprietary bidding exchange technology is unique and gives us a real kind of opportunity to continue to grow in both cohorts. But I think, importantly, a significant opportunity for us is to leverage what others don't have, and that's that local presence. We have local brands. We have local people. We have local sales force. And our ability to access businesses in these markets from hundreds of markets across the country quickly and inexpensively is a real asset for us and gives us a real advantage over other players who have a name and -- but not a name brand in that community. The other thing I would mention is we've -- not just us but the work we've done and others have done has really borne out that businesses in a community want to do business with as few vendor partners as they can. They don't want to do business with 10 different people to help them manage their social media strategy. And if possible, they want to do some business with somebody local. So part of our strategy is to develop a very comprehensive digital marketing solutions product portfolio that we can then bring to our business customers or potential customers so we can answer both of those needs. We're local, and we'll give you -- it's a one-stop shop.

And where are you right now on the DIY product? I know you said you're hiring people to build it out. And so it's early stages. But as we think about over the next period of time, when do you think that will be rolled out and...