Gannett Co., Inc. (NYSE:GCI) Q2 2023 Earnings Call Transcript

Despite secular headwinds, the decrease in print advertising revenue was limited to 8.9% year-over-year on a same-store basis, marking the smallest decline observed in the past year. Our sequential trends also improved by 180 basis points compared to Q1 of 2023. The results in print subscription revenue continue to show promising improvements driven by the actions we implemented to enhance the subscriber experience. We believe our investments in addressing open routes and distribution challenges are paying off with the percentage of open delivery routes declining over 44% versus the prior year. In Q2, our other revenue category, which includes commercial print and delivery faced muted trends, which had a negative impact on the Company’s overall revenue.

Despite two years of recent growth, this revenue stream experienced a 5.3% year-over-year decline on a same-store basis. This decrease can be attributed to a reduction in commercial print volumes as well as lower digital media CPMs, which negatively impacted the third-party monetization of our syndicated content. Moving to our digital marketing solutions business, total revenue in the second quarter was $122.8 million, an increase of 4.6% year-over-year on a same-store basis. Adjusted EBITDA for the segment was $15.5 million, representing a margin of 12.6% in the second quarter and an increase of 50 basis points year-over-year. The average monthly customer count increased from Q1 but decreased 5.6% compared to the prior year period due to higher churn across the lower margin customer segments.

However, core platform ARPU reached a record high in Q2, growing 10% versus the prior year period. Additionally, budget retention saw an increase of 70 basis points year-over-year, reaching 95.6% in Q2. We believe these positive trends reflect our continued emphasis on the product portfolio and our focus on delivering an outstanding client experience. Let’s now shift to the balance sheet. At the end of the second quarter, our cash balance stood at $106.6 million, translating to net debt of approximately $1.1 billion. We generated free cash flow of $38.4 million in the second quarter, marking a substantial increase of $81.7 million compared to the prior year period. Looking ahead, we anticipate significant free cash flow generation in Q3 and Q4 of this year, with the full year expected to be between $90 million to $110 million.

We ended the second quarter with approximately $1.2 billion of total debt. Our first lien net leverage decreased to 2.26x, reflecting $15.1 million of total debt pay down in the second quarter and improved adjusted EBITDA performance. During July, we repaid an additional $8.2 million of our term loan using the proceeds from recent real estate asset sales. Debt repayment remains a top priority for us. And as a result, we expect our first lien net leverage to fall well below 2x by the end of the year. We continue to maintain a sizable real estate sales pipeline of approximately $50 million to $60 million, which combined with our expected free cash flow improvement, will contribute meaningfully to our debt repayments for the remainder of the year.

At the end of the second quarter, Gannett took legal action by filing a lawsuit against Google in Federal Court. Overall, we felt this was an appropriate time to enter the litigation given the parallel lawsuit from the Department of Justice as well as additional actions at the state level. We believe that billions of dollars of advertising revenue were negatively impacted over the time frame in question. We feel confident in our position, as outlined in the claim. And importantly, from a financial perspective, we do not expect this legal action to have any meaningful impact on Gannett’s operating expenses or cash flows during the course of the lawsuit. Turning now to guidance. We are reiterating our prior guidance as described in today’s earnings release with respect to revenues, same-store total revenues and first lien net leverage.

As a result of our second quarter performance, we are increasing our 2023 full year outlook for both adjusted EBITDA and free cash flow by $5 million. We now expect full year adjusted EBITDA between $290 million to $310 million, which translates to expected year-over-year growth of nearly 20%. We expect significant growth year-over-year in Q3 due to improving same-store revenue trends and the ramping of our cost management initiatives. Free cash flow is now expected to be in the range of $90 million to $110 million, representing a conversion rate of at least 30%. We also raised our 2023 full year outlook for both net income attributable to the net and cash provided by operating activities by $5 million. For the full year, we expect net income attributable to Gannett to range from a net loss of $10 million to a net income of $20 million.