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

Just a high-level strategy question. Like you said -- I mean, at one level, like your strategy is very clear, but there were a lot of things that happened on that last earnings call where you were talking about serving machines and stuff like that. And so I thought maybe just to start us off, just a high-level simple strategy question. What is your firm's strategy? How has it evolved? Where are we now? And what might change?

Yes. And trying to keep it simple and short, I think the way I would answer that is we are -- we have one of the biggest content creator forces in the country. We create content every day that's relevant to consumers. We're kind of in the news space, although we've branched out into entertainment, sports, games and things like that. But we have a national play and a local play, which makes us a bit unique compared to most media companies. But we're a content creator and what's really the underlying strategy is create content that's relevant and unique, valuable to consumers and to build an audience on our digital platform at scale. And that's really the underlying strategy. What is changing really rapidly that impacts Q2, both positively and negatively is the search landscape is changing dramatically from the old search to new AI search, and that's impacted where consumers when they're doing search, what platform they stay on versus moving across -- around the open web. And that impacts us more in a negative way than a positive way. But then on the other hand, AI is creating opportunities for us to take the data we have on consumers, make it into intelligence that we can then use to create a more personalized and engaging experience for consumers, which we think in the long run will lead to better revenue opportunities for all consumers on our platform. So for us, it's -- the strategy is still create content that's unique, but yet relevant, bring audience to the platform. leverage that data once they're on the platform, we get signals, turn that signal into intelligence, actionable intelligence and then have an opportunity to monetize that consumer on our platform. And our digital revenue strategy is across 5 really diversified revenue streams. We're not all in on any one. We're really focused on 5 that's digital subscription revenue, digital advertising revenue, e-commerce revenue, digital marketing services and then licensing and syndication of our content. And across those 5 categories, we're looking to be able to grow ARPU per consumer on the platform as well as expand overall margins of the business as we especially enter licensing deals. So definitely -- it's complicated, and we could go into a ton of detail, but that's the underlying strategy, grow audience at scale, leverage, take that data, make it into actionable intelligence through technology today that makes a more personalized experience for every consumer on our platform.

Okay. And when you say the search ecosystem is evolving rapidly, that is something that transcends just the AI overview or whatever, right? This is just constant changes that are being made by Google all the time and then punctuated by this recent AI overview change or...

Yes, correct.

Yes. Okay.

Yes, correct. Deprioritizing search, removing things from search, Google plays a lot of games.

Right. They just want to keep you in their walled garden.

That's right.

All right. So Trisha, I have -- this is a question more for you. So I think the North Star for your stock is same-store revenues. That seems to be the thing that investors are most focused on. And the declines were like pretty sharp, almost 8% back in the first quarter of '25. And then almost every quarter, uninterrupted, it just got better and better and better and better until we got to, I'll call it, minus 1.8%, call it, minus 2% in the first quarter of '26. But then we sort of retrenched back down to minus 6% in the second quarter. And the stock sort of reacted to that, I think. And so my question is pretty simple. What happened in 2Q that caused this uninterrupted improvement to sort of get interrupted for 1 quarter? And do you think investors should take that as indicative of future growth? Or is that just a blip on a multi-quarter, multiyear improvement trajectory?

Yes, I think that's a great question. And I think the strategy that Mike just outlined really leads us to what we said we would do this year, and that is meaningful improvement in our same-store revenue. And we've done that through the first half of the year. And we came into the year saying that there would be quarterly variability in our business. And I think it's really important to separate the quarterly variability that we alluded to when we came into the year signaling and the underlying fundamentals of the business, which we think are moving in the right direction and are what are going to give us that sustained improvement in same-store revenue. And I agree. I think that's the metric that investors look at the most and certainly what we look at. And so the AI content licensing business, which is growing, is still a very nascent business. There's a lot of quarterly variability in how that revenue is recognized. And we signaled that as we came into the year. It was particularly strong in Q1, not as strong in Q2, although it still had 20% year-over-year growth in the quarter. But when you look at the second quarter, you look at our digital-only subscription business, that grew nicely, a second consecutive quarter of year-over-year growth. We drove new highs in ARPU. Our content licensing business continued to grow again at double digits. Even in a quarter where the same-store revenue didn't show the same kind of improvement in the first quarter, we still grew free cash flow year-over-year. We posted a solid net income. So I think it shows that we're able to control all of the variables even as the top line has some variance quarter-to-quarter. But I also think that the second quarter is not indicative of where we think we'll be. Certainly the quarter where we started to see the most impact from search on our traffic. But we're doing quite a bit under -- in the foundation to bring that traffic to us in different sources. We expect that to improve in the second half of the year. So overall, a really strong first half of the year, and we think we'll continue to improve those trends as you've seen over the past several quarters.

Jason, I would just add to that, as Trisha is saying, I think with a transformation like we're going through from a legacy print business to a digital business, there are 2 steps forward, one step back and there are fits and starts and then there are things changing in the technology world and in the search world, and they impact our business. And so one of the things we really talk to investors about a lot and we manage the business this way internally is on an annualized basis, are we continuing to make progress because there are going to be some fluctuations quarter-to-quarter. And sometimes the stock market quarter-to-quarter is more like a casino, and it's not really the right way to look at our business. And if you looked at the LTM, for example, at the end of the second quarter, while we had a step back from Q1 to Q2, our LTM at the end of Q2 was still improved from the year before. So I think the year before in Q2, our same-store was down 7%. So our LTM now with the down 6%, and it's a little bit better. So we are -- we really do encourage that kind of that long-term view of on an annual basis, are we continuing to make progress. And if you look back over the last 3 or 4 years, we continue to make progress on same-store sales towards that inflection point and then at the same time, expanding margins and growing free cash flow.

That inflection point, meaning flatter growth.

That's correct. Yes.

All right. LTM. Trisha can you go back to one thing you said? What was it that grew 20% in the first quarter? Was that all digital? Or that was digital? What was it?

Yes, digital other grew 20% year-over-year in the second quarter.

Okay. In the second quarter. Now maybe it's very hard for me to unpack sort of digital other, but I sort of assume that the weakness that we saw in the second quarter was really just a function of smaller AI licensing revenue, but maybe that's not right. Maybe it's more around some of the search things that you were bringing up. Can we sort of -- is that -- is it sort of an AI issue or it's more digital advertising dollars related to the search changes or both?

Yes. Well, I think if you're just simply comparing Q1 to Q2, down 2% versus down 6%, it is both. We had more licensing revenue in the first quarter that was tied to a specific set of content that somebody bought from us that didn't repeat in Q2. So that -- there was a difference there. And then we saw some changes in Google Search that impacted us more in Q2 than it had in previous quarters. And so there's a combination of those 2 things.

Okay. That's great. And then on the AI side, can you just remind us, Mike, what AI deals you've done so far and which just by in terms of names. And then are there any left? Or should investors think of -- it's just about sort of getting more juice out of the lemons that where we already have contracts?

Yes. No, there's more or less. So we've done deals so far with Meta, with Microsoft with Amazon. But -- so we will -- we do think we'll get more juice out of those lemons, those 3, but there are a lot more deals to do. There's just some of the names you could think of are Apple and Anthropic, OpenAI, Grok, whatever [indiscernible] is. And then there are the social media platforms that as each day goes by and you have so many hallucinations and fake content out there, our content being a trusted source of content, there's more -- that's being sought after more by the social media platforms who want trusted content on their platform. And so them licensing or paying us essentially think about it like a licensing fee to produce more of our content onto those platforms in addition to our own, which is part of our growth strategy anyways, but that opens up more paths for deals as well. So we do think there's 1 or 2 more deals to come this year. We did say that on the second quarter earnings call. So I think you'll see that in the next couple of months. But then there are more deals to do out there as well.

Okay. And then when -- I think investors always struggle with these AI deals because it's like I think we sort of learned some of this is -- you've always said it's lumpy, but it's very hard for us, is it like fixed or variable or some combination of the 2. Without getting into the specifics, can you just qualitatively describe how these deals are typically struck?

Yes. And I say lumpy partially because the -- there's a lot of reasons why it's lumpy, but partially because this ecosystem is so new and it's just evolving and our partners on the other side who have the AI business are really still trying to figure out their business model. And so compensating us for the content as they figure out their business model, I think, gets easier. And I still think there's a big disconnect between what we perceive our content is worth and what they perceive it's worth. And I think that dynamic continues to work in our favor each day because there's so much fake news out there and so much hallucination out there that trusted content is becoming more and more valuable. But as their business models evolve and as the desire to have trusted content evolves, I think that these deals will become less lumpy and they'll have a more -- it will be easier to understand how they work and to lay out how they work. Right now, there's -- every deal we've done has been really different. Some have been more pay on performance. Some have been we want to buy archived content. Some are we want to buy real-time content for the next 2 years. So each deal has been structured a little bit differently. And so that's why I think this ecosystem still has to evolve for the deals to become more consistent.

Okay. That's super helpful. So outside of AI, I'm going to turn it back over to you, Trisha. The beyond AI and within other revenues, you've got a handful of these. So digital subscriptions, they grew year-over-year. But when I sort of look at the long-term numbers, like digital subscriptions, it's sort of flattish with like a lot of volatility, like the subs go up and then the subs go down and the ARPU is down and then the ARPU is up a lot. Like it's very hard to get a ton of modeling conviction as you're sitting there trying to go out and prognosticate the future, right? But you guys sound very optimistic about where digital subscriptions are going. So maybe just talk a little bit about both the past in terms of the quantity and the price moving up and down and then what we should expect going forward and why you're so optimistic about digital subscription.

Yes, absolutely. So our digital subscription business has been growing this year year-over-year. You pointed that out in the second quarter, we saw good growth year-over-year. That's been driven off of our ARPU. So our ARPU continues to hit record highs, up over 30% year-over-year in Q2, consistently double-digit growth year-over-year. And we think we have continued headroom on our pricing. We think we can continue to improve ARPU. But what you've seen is that our volumes have been pretty stable to declining. And what we saw in the second quarter that has us really optimistic is the fact that we're starting to see the underlying metrics of our volumes give us the indication that we're at the point where volumes will start to return to growth. We've been incredibly disciplined in our pricing strategy over the past year. And that means we've let go of high churn, low lifetime value customers that brought in a lot of volume but didn't bring in a lot of revenue. We've taken that off of our platform. That's helped us increase our ARPU, but it's also given us a much more sustainable and predictable base of subscriptions and subscribers. And from that, we can model the future more predictably than we've been able to in the past. And so as you look at Q2 and you see things like our churn metrics are improving, our start-to-stop ratio is improving, our retention, our engagement is improving. And so long term, growth really does need to come from both levers. It needs to come from ARPU and it needs to come from volume. You're seeing that ARPU growth now. I think you'll see that continue. But I think you'll only see digital subscription revenue growth be more substantial as we bring back volume growth and ARPU growth.

So more stable going forward?

Yes. We did a lot of work over the past year. It was painful to take those high churning, like I said, low lifetime value consumers off of our platform. They were difficult to model, but we've done the work so that we have quality subscriptions left in our portfolio.

And when you guys say start to stop, that's just gross add as a start and someone that churns as a stop?

Correct.

Okay. And you're looking at that ratio and it's getting better and better -- that's great. So digital ads down, I think it was 9% in the second quarter. Does this just all circle back to the search changes? Or was there something else going on in the digital ad market beyond the search changes you alluded to?

Yes. So there were 3 things that happened in the second quarter that each had about equal weight. So the second quarter was the first quarter where we really saw the change in consumer behavior, search behavior impacting our digital advertising revenue. We also saw one of our programmatic partners being removed from one of the platforms that we use. And then we did see a change in one of our vendors, a Google algorithm change, which impacted one of our vendors, which then flowed through sponsored links onto our platform. I would say all of those had about equal weight in the quarter. The thing that we're most excited about is that we have the ability to bring consumers onto our platforms in different ways. We've been intentionally stepping away from search for many quarters now. I think you've heard us talking for well over a year about lessening our reliance on Google Search as a funnel for traffic onto our platform. And the work that we've been doing, whether it's around social or newsletters are still a very valuable channel for us in acquiring customers. As those start to scale and stack up, we have the ability to change that digital revenue trend in the back half of the year. I think you also have heard us talk a lot about the work we're doing around technology, the signals on our platform, our known users. And as that grows across our platform, our advertising CPMs start to grow as well. So I don't think that the trend that we saw in the second quarter is indicative of where we'll be in the back half of the year.

Great Trisha thanks. So Mike, I'm going to shift it over to you. During the second quarter, you brought up Palantir for the first time. At least I've missed this if you mentioned it in prior calls. What are you doing with Palantir? What -- if you can sort of dumb it down to explain for a layman, what does that mean? How is it going to help?

They have a software that they've written called Foundry over the last 20 years, and we're essentially renting that. So what we do and the simplest way to think about it is we take the data or the signals we get from consumers on our platform, and we have so much history of that. Not only do we create new signals every day, new data every day, but we've got history. So we have tons of data. And what we do is rent Palantir's software to turn those signals into actionable intelligence. That's really what we're doing. So with every single consumer on our platform, we can serve them a more personalized experience. These are the -- this is the content we need to serve that consumer. Here's the e-commerce link we need to embed into that content. Here's the subscription offer we should deliver at this time, at this price to that consumer. This is the type of advertising that will work with this consumer. And so it's essentially taking the data or all those signals we have in all the history, but also the new stuff we're creating and really turning it into actionable intelligence. For us to do that ourselves, it would take years to build the software, and they've done it. And so the data is ours, the output is ours. The last mile of delivery of that intelligence is on our platform. So it's really all of our stuff. We're renting their software and their future deployed engineers to help us. And so I'm really excited about the opportunity. And what might take us years to do, I think we can do in months with them.

So let's say that this succeeds, what ends up happening? We just see digital revenues get better as the advertising gets better.

Exactly across all categories, commerce subscription and advertising, I think, across all 3. So I think you would look at -- instead of looking at just a number per subscriber, we look at a number per consumer on the platform because there's a lot of people that will never subscribe. So our overall revenue per consumer on the platform should grow meaningfully from $2 where it is today to a much larger number in the future.

And that's $2 per DAU, -- is that what you're measuring or $2 per MAU or when you say a consumer on your platform?