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

Hi, everyone. I'm Mike Reed, Chairman and CEO of Gannett, one of the largest media companies in the U.S. And we also have one of the largest media companies in the U.K. Currently, operate in about 250 markets across the country with daily and weekly digital and print news publications and of course, we have the USA Today here in the U.S. Our audience is primarily digital and we're driving about 185 million uniques to our platform every month. And as you'll hear in the presentation today, about 40% of our revenue is now digital and we expect that to grow for that percentage decline pretty rapidly over the next couple of years. So in terms of audience, we're one of the top 5 or 6 generally as scored by Comscore every single month. We're one of the top media companies in the U.S. going through an evolution from a legacy print business to a digital business and we'll talk a little bit about that today. But first half of the year is, we've gotten off to a great start. Been really strong. We've hit a couple of inflection points with regard to EBITDA and cash flow that we expect to be sustainable for quite a few years to come and we're getting very close now to our inflection point on the top line. In addition to a strong first half of the year, what really was our best was the second quarter and we saw EBITDA grow 40% over the prior year and we saw free cash flow grow 200%. Revenue trends improved in the quarter from a same-store perspective for the second consecutive quarter. We expect same-store trends to continue to improve in Q3 and Q4 and we expect to hit our inflection point where revenues grow sustainably towards the end of next year. So we're just over about a year away from that. Notably, in the second quarter as well, digital revenues returned to growth. Many of you know, there's a lot of macro pressure on digital advertising that began about a year ago. Second quarter last year, we saw digital revenues return to growth in the second quarter and we expect that growth trend to improve in Q3 and Q4. 39% of total revenue in the second quarter came from digital sources and we expect that to surpass 40% in the third quarter. And as we get to our inflection point next year, we'll be a lot closer to 50% of total revenue being sourced from purely digital sources. We do expect EBITDA growth in Q3 and Q4 again this year, and we do expect to end the year with approximately $100 million of free cash flow versus a flat free cash flow next year. And I'll get into that a little bit more as we go here, too. But we're optimistic about the back half of the year. Another real strong point in the first half of the year is debt repayment and leverage reduction. We've reduced first lien net leverage from 2.68 at the end of the year to 2.26 at the end of the second quarter. That comes both through debt repayment as well as EBITDA growth. We do expect that first lien debt to fall meaningfully below 2.0x by the end of 2023. So we're making rapid improvement to the balance sheet through delevering. 4 key value drivers for the business, which we show on Slide 3 of our small presentation and they're all in line with evolving the business model from a legacy print business to a much broader, bigger digital business, both a digital marketing solutions business as well as a content business and we'll talk about both of those today. The value drivers assist stabilizing revenue trends. We've been a melting ice cube for a long time now and we are so close now to the edge of that inflection point where digital revenues are growing at a much faster pace than prints declining. And we're harvesting print better now, stabilizing those trends a little bit, which puts us in a position to really stabilize the revenue trend next year and then see growth from there on. We're starting to see that march towards stabilization now. As I mentioned, we've had 2 consecutive quarters of revenue trend improvement, and we expect to see that again in Q3 and Q4. We expect that to continue into next year. A big value driver for us is obviously stabilizing and then growing the revenues on a sustainable basis attached to sustainable EBITDA and free cash flow growth. So inflection point sometime just over a year from now. We've already hit the inflection point with regard to EBITDA and free cash flow. Significant growth in the first half of the year. We'll see growth again in the second half of the year and we expect that growth to continue for 2024 and beyond. Second real value driver is accelerating digital growth. Our real investment and our real future is in digital. As I mentioned, we returned to growth in the second quarter. We were so glad to see that with all the work we've been putting into that. 39% of total revenue is now digital. We'll pass 40% here in the third quarter. We're focused on recurring digital revenue streams, but we're also focused on diversification of digital revenue streams. Our eggs are not all in one basket. We're focused on digital subscriptions. We're focused on digital affiliate and transaction revenues. We're focused on digital advertising revenues. We're focused on recurring digital marketing solution revenues. So we have a various -- a variety of buckets that we see significant upside for with all of them as we go forward, which gives us the confidence that we're not only going to hit the inflection point next year, but that there's significant growth ahead for us. So on the media side, we're building a platform with 185 million uniques today. As we broaden the content play there, we expect to be able to grow that audience. But more importantly, we expect to be able to engage better with that audience, growing 3 forms of revenue at a high level, digital subscription, digital advertising and affiliate and transaction revenues. And then we have our digital marketing solutions business, which is a B2B business. We have close to $0.5 billion of revenue there today. We expect to be able to double that over the next 5 years. However, the growth will come more from the product software side than it will from the agency side. So we're pretty excited about that. I'll mention it later, but we did hire a new President for that business, Chris Cho and we're really excited about his strengths and his talents and what he's going to do for that business. So digital revenue is a key component of our overall growth strategy. Digital will allow us to achieve the first priority here, which is stabilizing growth. And we feel really good about where we are today and what the second half of the year looks like. Third and fourth components go together a little bit with growing strong EBITDA and free cash flow. We're focused on product profitability. We're focused on ARPU per customer. We're focused on better customer acquisition spend and of course, cost optimization, focusing on the cost structure, all of those things leading to increased profitability based on the revenues we have today and based on the revenues we expect to get in the future. And as a result of EBITDA growth over the coming years, we expect free cash flow growth as well. However, there's a really good point that's worth talking about there with regard to free cash flow. We're currently converting at about 30% rate from EBITDA to free cash flow. We expect that conversion rate to grow to 50% to 60% over the next couple of years. Reason being is some of the cash expenditures we have below EBITDA, such as restructuring, severance costs, interest costs, pension costs, we expect those to come down significantly over the next couple of years and we're starting to see that now. So as those costs lower and EBITDA grows, we expect -- and we grow our free cash flow conversion percentage to 50% to 60%, we expect really significant free cash flow growth over the next few years. That puts us in a position to really strengthen the balance sheet. We'd like to come out of this with a pristine balance sheet in the next couple of years. We've made -- as I mentioned, we've made significant progress in reducing debt so far this year. We're going to continue on that path for the rest of this year and next year, our #1 priority for capital from the capital allocation standpoint is debt repayment. And so we're highly focused on reducing that leverage to somewhere net leverage around 1x, maybe below 1x. So we've made great progress going from just under 3x at the beginning of this year first lien net, we'll be under 2x first lien net as we end this year and we'll make significant progress on that again next year. Matt, if you want to go to Slide 4; 4, 5, 6, and 7 are just highlights of the 4 things I just captured. So Slide 4 is our focus on stabilizing revenues. As I mentioned, the stabilization will really come through accelerated digital growth, combined with better maintenance of print. We've had 2 consecutive quarters of trend improvement. We expect that to continue in the back half of this year. We expect to reach our inflection point in late 2024. Growth will really come from digital. We have a lot of different digital undertakings where we are already creating significant businesses and see real growth ahead. So we're pretty excited about how this revenue picture will unfold over the next 6 quarters, putting us in a position to grow sustainably over the long term. Matt, if you want to go to Slide 5. It's really -- this is the focus on our digital growth and the position we're in today. As you can see, we have significant audience, significant customer count and huge opportunity. I think the important takeaway here for us is that we have a diversified approach to revenue growth. Our eggs are not in one basket. We're not all in on a digital subs growth and if it doesn't happen, we fail. We have a digital subs plan, growth plan. We have a digital advertising plan. That's both premium sales and programmatic sales. We have a partnership program that's generating affiliate and transaction revenues that's well underway. We see a big opportunity there. So the real nuts and bolts of the work that will drive all 3 of these is our work on the content side, to drive a broader content plan that brings in a broader audience, but also allows us to engage more with the audience we have today, which is there for news. We're really excited about that opportunity. We hired a Chief Content Officer about 4 months ago. She's off to a great start. We're already seeing significant growth in audience and page views as a result of the work she's doing. In the next -- there's going to be many next steps in her journey, but engaging with our consumers on a broader basis beyond news is going to be critical to us growing all of these revenue streams as we bring people on our platform and keep them for a longer period of time. And then our digital marketing solutions business is another one. We're almost $0.5 billion today. We see that doubling over the next 5 years. Our penetration rates are still low. This is a $300 billion marketplace growing at about 9%. Our penetration, as I said, is low. We have a new President of this particular group who's helping us build out our SaaS part of the business, which is already launched. We went from 0 to about 150,000 freemium users on the SaaS platform over the first year. So we're excited about continuing to build that out, turning those customers into better-paying customers and bringing them on to the other part of our DMS platform. So lots of opportunities with digital. Look, it's about 40% of our revenue today, so it's just over $1 billion of revenue. And we see that -- we see the opportunities for digital revenue growth being material over the next few years. Slide 7, Matt. Just a quick recap on the EBITDA. You can see here, EBITDA has returned to moving in the right direction along with free cash flow. We see that continuing in the second half of the year and into next year. We have been able to take significant costs out. We are working on other cost optimization programs. We're seeing some easing in some of the key inflation pressure areas such as newsprint, raw materials. So we do expect with improving revenue trends that get to flat by the end of next year, combined with existing cost programs, we'll be able to grow EBITDA and free cash flow again next year. And as I mentioned, free cash flow growth will also benefit from lower pension costs, lower interest costs, lower restructuring and severance costs. That then leads us into the next slide, having healthy generation of free cash flow to continue to significantly pay down debt. And that's a big opportunity for us. We want to get first lien net leverage below 1. Then we have to work on the converts, but taking leverage out of the equation of the discussion with regard to it being a pressure point on valuation for the company is a goal over the next 12 months. We're making great progress and expect to be there by the end of next year. So a couple of things I would say is, as I wrap, we've made some recent additions to the team in the key areas that we see for growth where we needed some upgrades. As I mentioned, Kristin Roberts is our Chief Content Officer. Imtiaz Patel is our Chief Consumer Officer. Chris Cho is the President of the DMS business, and Jason Taylor is our new Chief Sales Officer. Great talent. They've all hit the ground running over the last 2, 3, 4 months. We're seeing the results of their contributions already, but we're in the first inning of what they're going to do for us. Great first half of the year. Very optimistic about the second half of the year, reducing debt and leverage fast. We see lots of opportunity to create value for shareholders. The truth is we think the equity is mispriced today. Enterprise value of $1.5 billion seems incredibly low when you look at how fast we're delevering, how fast EBITDA is growing, what the free cash flow profile looks like and being so close to the inflection point on revenue with increasing or improving revenue trends as we speak today, driven by our long-term growth opportunity in revenue, which is digital, which returned to growth. So we think the equity is mispriced. And there's -- as we continue to execute on our strategy and our financial results prove out, there will be significant upside for our shareholders. So with that, maybe I'll move to questions with Jason.

Well, great summary. I'm also joined by Doug Horne, CFO of Gannett. Thank you both for coming.

Absolutely. Thank you for having us.

Yes, yes. So I just heard you articulate your strategy to pivot from a legacy analog print-centric business to something that is much more digitally-centric. If you just had to give sort of the maybe the 3 -- let's pick 3 main vectors that are going to allow you to achieve that, what would those 3 vectors be?

Yes. So it really starts on the -- I'll look at 2 vectors, really. On the content side, it's diversification of the content that we produce beyond news so that we're reaching a broader younger audience and we're engaging better, not only with that audience, but with our existing audience. So there are 185 million people that are coming to us for news. What else can we do from a content perspective that keeps those folks engaged with us? Obviously, we know what they're consuming, what they're looking at. The benefit of artificial intelligence and data collection and analysis puts us in a position to be able to do things with those consumers that allow us to engage with them longer. A couple -- to put some meat around that bone, we're thinking about things that are more bigger in the sports area, bigger in financial services, bigger in health services, bigger in entertainment, things that we know will drive audience and keep audiences engaged where we can, through partnership or through ourselves, get that content and have that content and have it be the kind of content we're proud to serve on our platform. So on the media side, it's really diversification of content, so we have a broader, more engaged audience, which leads to all of those revenue opportunities I talked about, whether it's subscription, affiliate and transaction, or advertising. On the digital marketing solutions side, it's developing further our SaaS products. Right now the majority of our revenue comes from more of a digital agency model where we're selling. And we have great algorithms that allow us to do great media spend for our customers and our retention rates are above 90% in that business. So what we do for them works. But our ARPU is high. It's $2,600 a month. There are 32 million SMBs. 29 million of them don't spend $2,600 a month. So for us to really penetrate SMBs across the country and in our media markets, we have to have products that are more affordable. But the things we're doing for the bigger SMBs that can spend $2,600 a month are the same things the small businesses need. So we just need to develop those in more of a SaaS model where they can be purchased much more economically by small businesses. So that's the main reason we brought Chris Cho in. So the 2 vectors, Jason, are developing that SaaS business on the DMS side that will really allow us to open the Pandora's box in terms of the potential customers. And on the media side, it's opening and engaging with more consumers through a diversified content play.

What would be sort of a practical example of a SaaS product on DMS? Like I'm a small business. So you're going to come and sell me on a recurring basis?

Yes. So you can put -- you can put into the -- you can buy a product that allows you to allocate -- tell how much you want to spend, what kind of lead expectations you have, how much you want to spend. We can help you allocate that through our algorithms without us -- without you ever talking to anybody. Plug in -- you answer certain questions, plug in certain data and it's all done for you and the marketing is done for you through our platform.

Okay. That's super helpful. What -- interestingly, as we talk about this pivot, this digital pivot, you didn't spend a lot of time talking about stemming the declines on the legacy part of the business. Is that because you feel like that's sort of more of a known-known? You sort of have -- you know what the trends are. It doesn't take a lot of energy?

No. No. You only gave me 10 minutes.

Okay. Right.

No. No, it is an important part of the strategy. It is definitely worth more conversation. We've made a lot of progress actually over the last 18 months in improving the trends both in the print advertising world as well as the print circulation world and in single copy circulation world. So it's an important piece of the strategy and we're making progress on it. We -- it's not easy. It's definitely hard, but it's not where the growth comes from, right? Growth comes from digital, obviously, but it's an important piece. Achieving our inflection point quicker, right, will happen if we are more successful with stabilizing print.

Can you just remind me how many -- I feel like it was maybe 2 years ago, maybe it's more, when you first picked the tail-end.

'24.

Of '24 to hit that inflection point. Do you remember how long ago you first articulated that?

I think it was about 2 years ago. Yes.

Okay. And so what gave you the -- I mean, that's a long way to look into the future to say, okay, 18 months from now and you said it 2 years ago. So we're going on almost 4 years. Well, you haven't changed.

Yes. No. It's the modeling we've done based on the product orientation we were developing in the DMS business, in the media business, the projects we've been working on to stabilize the print side of the business, all of those things in a model gave us confidence around an inflection point of 2024. Now everything is not perfect. Digital advertising slowed a lot last year. You know the macro environment that hit digital advertising, and there's still pressure on CPMs and digital advertising. So digital advertising in the fourth quarter of 2024 will be a little bit less than what was in our model 2 years ago. But what we are -- what we've developed that we didn't have in the model back then is our partnerships in affiliate transaction revenues. So our partnership with Forbes on financial services, our partnership with Gambling.com. We've just signed for another 5 years and enhanced our partnership with Taboola. So there's new revenue opportunities that we think are significant, actually, probably more significant than digital advertising in the long run that have come into the mix. So we still have a lot of confidence. I wish I could say it's exactly the way we modeled it in '24, it's not -- we've had something...

It happens to me, too. It's okay.

Some things have gone better than we thought, some things have gone worse and we've had some new things develop.

Okay. So can I talk -- can I shift gears and talk about capital allocation?

Yes.

You mentioned the $100 million-ish of free cash flow. You talked about the EBITDA to free cash flow conversion improving. But for buy-siders that are out there that are thinking about the quantum of free cash flow that they should think about for debt reduction, is it as simple as just taking the $100 million and maybe, I don't know, $50 million, $60 million of asset sales or could there be -- could it be bigger than that as people are thinking about sort of debt reduction?

Yes. I think they can think about it being bigger than that. And I think the way to think about it is our guidance out there, I think the midpoint is around $300 million for EBITDA. So if you pick that and then you say, okay, the company is forecasting growth there, so you can pick your number, whatever you want it to be 5%, 10%, 20%, whatever you want it to be, pick a number, but then also look at the free cash flow conversion going from 30% to 50% to 60%. So even if EBITDA stayed at $300 million for the next 3 years, free cash flow is going to grow much more significantly because if your conversion rate goes from 30% to 60%, you're going to go from $100 million to $200 million for asset sales.

Understood. Do you anticipate a lot more asset sales? I mean, I think you've penciled in $60 million or something was the...

I think $65 million to $75 million was our guidance for this year with the announcement we made in July, where we sold about $42 million, I think and we actually bought back $47 million of debt. We've been opportunistic in picking off debt trading below par in the market. But with that asset sale, combined with what we did through the first half of the year, we're pretty close to that $65 million now. We do have a few more assets we'll sell in the remainder of the year, which gives us a lot of confidence that we not only will hit our target, but we may outperform that target. So going forward, though, I think for 2024, you could think about $50 million to $75 million of asset sales, but I think after that…

You're pretty much done.

With nonstrategic and with real estate.

Okay.

So free cash flow generation will service -- will make our debt payment.

That's super helpful. Now I want to go back to these partnerships because I feel like you have a fair number of them. It's sort of a new part of the narrative. You've reinforced it here by talking about how you want to broaden your content away from news. So can we just pick off a few of these and just can you unpack them a little bit? I think the most recent one was from Gambling.com…

Right.

If I remember correctly. So what is that? So you have this partnership with Gambling.com, what happens?

So Gambling.com actually prepares the content that we actually put on our platform. It drives audience to our platform and gives our existing audience content that is more specific to things around gambling on sports. So it's not an investment we need to make in content. Obviously, picking the partner that we trust the content they're going to put on our platform was important. But Gambling.com prepares content around games, leagues, whatever you can bet on, whatever you can imagine. They prepare really good content around it that introduces betting in lines and sportsbooks to readers of this particular content. On the other hand, Gambling.com has relationships with all of the sportsbooks. And so when...

Is it like a DraftKings? Is it like...

With the DraftKings, with the FanDuel, with BetMGM, with hundreds, actually around the world. And so when -- so we're agnostic to what sportsbook a customer of ours, a reader of ours may choose. It doesn't really matter as long as they find it and they click on a link on our platform, we're going to share 50-50 in the revenue with Gambling.com that they have with…

With the sportsbook.

With the sportsbook.

Okay.

So it's a pretty interesting play because we have to do a lot of work to make sure we understand and trust the content that's going on our site so that we don't diminish the integrity of the site. But once that's done and we start to run their content, any revenue we get, I mean it's not costing us a thing, right? So any revenue we get, it's a 100% margin.

Understood. You're bringing a big audience.

Yes.

Okay. Do you want to pick another one?

Well, the forbes.com, Forbes marketplace deal, we call it is a bigger one because that's around financial services. So you think about all of -- every consumer that has to make financial services decisions from time to time, whether it's interest rates on credit cards, interest rates on a potential mortgage, what kind of credit card do I want to use, what kind of life insurance should I buy? Who should I look at? What's the -- think about all the financial services out there. Forbes creates incredible content. It gets displayed on our platform. Our 185 million people see it. They click on a link to take an action, we get paid, it's the same thing. We split the money with Forbes. That category is so much bigger because there are so many financial transactions and so many relationships that are in the mix that we think that -- and that by itself is a couple of $100 million revenue opportunity over 5 years.

And this is, maybe just explain it for a second, why is this better in Gambling.com or forbes.com, just buying some advertising space on your properties? Like what is it that makes this better for you and what is it that makes it better for your partners?

It's better for us because our -- we share in the -- we think that our audience will perform. We trust that our audience will perform. So it's better for us because our upside is uncapped, right? It's better for Forbes because there's no -- they don't spend -- they're already spending money to produce the content. Distribution would be in a whole other cost stream. And then the risk would be, does the platform where they're distributing and paying for that distribution, does it work by advertising? So...

Got it. So it reduces their sort of upfront cost, but then it untaps your...

It reduces their upfront cost. It also reduces their risk, right? If it doesn't perform, they're not paying us.

Understood.

And our upside is untapped.