Gannett Reports Third Quarter Results

Business Wire 8-Nov-2018 6:55 AM

ReachLocal Delivers Revenue Growth and Margin Improvement

Gannett Co., Inc. (NYSE:GCI) ("Gannett" or "company" or "we" or "our") today reported third quarter 2018 financial results for the period ended September 30, 2018 ⁽¹⁾.

"We are pleased with the revenue growth and continued strong margin improvement in our ReachLocal segment reflecting the scale the business is achieving," said Robert J. Dickey, president and chief executive officer. "Additionally, our recent WordStream acquisition delivered solid results in its first full reported quarter with revenues and Adjusted EBITDA both ahead of our expectations."

Dickey continued, "Our Publishing segment digital advertising and marketing services revenue growth slowed in the quarter, reflecting challenges within the local digital media category, in part due to the realignment of our sales organization. We expect the weaker results to continue into the fourth quarter and are therefore lowering our full year revenue and Adjusted EBITDA guidance."

"We remain focused on delivering growth in our digital business and rationalizing our cost base in light of the revenue challenges," said Ali Engel, chief financial officer. "In the fourth quarter, we are instituting an early retirement program and have announced two outsourcing initiatives within customer service and technology. While it is too early to quantify the exact expected savings, we believe we will achieve a significant benefit to our overall cost structure from these initiatives in 2019."

Third Quarter 2018 Consolidated Results ⁽²⁾

• Operating revenues were $711.7 million, compared to $744.3 million in the third quarter of 2017.
• Unfavorable changes in foreign currency exchange rates negatively impacted revenues by $2.4 million.
• Same store, day adjusted operating revenues declined 8.1% year-over-year.
• Total digital revenues increased 8.4% to $266.1 million, or approximately 37% of total revenue.
• Total digital advertising & marketing services revenues increased 7.7% to $199.4 million, or 49.4% of total advertising & marketing services revenues.
• GAAP net income was $13.4 million, including $14.3 million of after-tax restructuring, asset impairment charges and other costs.
• Adjusted EBITDA ⁽³⁾ totaled $70.1 million, compared to $73.9 million in the third quarter of 2017. Strong earnings growth at our ReachLocal segment was offset by higher newsprint expense and lower revenues within our Publishing segment.

Third Quarter 2018 Publishing Segment

• Publishing segment operating revenues were $616.4 million, compared to $660.3 million in the third quarter of 2017. On a same store, day adjusted basis, Publishing segment revenues declined 9.4%.
• Same store, day adjusted print advertising revenues for the quarter declined 20.3% year-over-year.
• Digital advertising & marketing services revenues increased 3.2% to $105.8 million, compared to the prior year quarter. On a same store, day adjusted basis, digital advertising & marketing services revenues increased 0.8%.
  • Digital marketing services revenues of $20.1 million rose 41.8%, on a same store, day adjusted basis, driven by higher client counts and higher average revenue per client.
  • Digital media revenues of $67.5 million fell 1.7%, on a same store, day adjusted basis, as weakness in local display more than offset strong growth in national revenues.
  • Digital classified revenues of $18.2 million fell 18.3%, on a same store, day adjusted basis, reflecting weakness across all categories.
• Same store, day adjusted circulation revenues fell 4.4% from the prior year quarter, better than the second quarter trend, reflecting the continued benefit from our full-access subscriber pricing initiatives, offset by expected revenue declines in single copy.
• Digital-only subscriber volumes grew 48.8% year-over-year and now total 472,000.
• Publishing segment Adjusted EBITDA was $72.7 million compared to $87.5 million in the prior year quarter.

Third Quarter 2018 ReachLocal Segment

• ReachLocal segment revenues were $109.6 million, up 16.8% year-over-year, despite a negative impact of $1.0 million from the fair value adjustment to WordStream's deferred revenue obligations as required by U.S. GAAP as well as the divestiture of ReachLocal's European operations. On a same store, day adjusted basis, ReachLocal segment revenues grew 7.7%.
• Adjusted EBITDA was $17.3 million, reflecting a 15.8% margin, up materially from only $5.2 million in the third quarter of 2017.
• The improved revenue and profitability in the quarter were driven by the addition of WordStream, higher average revenue per client and growth in our Gannett local and SweetIQ client bases.

Third Quarter 2018 Cash Flow

• Net cash flow from operating activities was approximately $60.9 million, compared to $34.1 million in the prior year quarter. The increase in net cash flow from operating activities primarily relates to the timing of pension contributions of $25.0 million in the second quarter of 2018, as compared to the third quarter of 2017.
• Capital expenditures were approximately $16.3 million, primarily for product development, technology investments, and maintenance projects.
• The company paid dividends of $18.1 million; there were no share repurchases.
• As of the end of the third quarter, the company had a cash balance of $108.6 million, $170.0 million drawn on its revolver and $168.0 million in convertible notes, or net debt of $229.4 million.

Outlook

For 2018, the company is providing the following outlook:

• Consolidated revenues of $2.90-2.94 billion compared to $2.95-3.00 billion previously.
• Consolidated Adjusted EBITDA outlook of $325-330 million, compared to prior guidance of $337-345 million.
• Capital expenditures of $60-65 million.
• Depreciation and amortization of $140-145 million, excluding accelerated depreciation related to facility consolidations and including an estimated $6.0 million for depreciation and intangibles amortization related to WordStream.
• The non-operating cost associated with our pension plans, recorded in other non-operating items, is currently estimated to be a credit of $5-7 million as compared to an expense of $21.0 million in 2017.
• A non-GAAP effective tax rate of 25-26% ⁽³⁾.

Conference Call Information

The company will hold a conference call at 10:00 a.m. ET today to discuss its third quarter results. The call can be accessed via a live webcast through the company's investor site, http://investors.gannett.com/, or listen-only conference lines. U.S. callers should dial 855-462-1958 and international callers should dial 503-343-6635 at least 10 minutes prior to the scheduled start of the call. The confirmation code for the conference call is 8877478. A conference call replay will be available through December 7, 2018. U.S. callers should dial 855-859-2056 and international callers should dial 404-537-3406.

Forward Looking Statements

This press release contains certain forward-looking statements regarding business strategies, market potential, future financial performance and other matters. Forward-looking statements include all statements that are not historical facts. The words "believe," "expect," "estimate," "could," "should," "intend," "may," "plan," "seek," "anticipate," "project" and similar expressions, among others, generally identify forward-looking statements, which speak only as of the date the statements were made and are not guarantees of future performance. Where, in any forward-looking statement, an expectation or belief as to future results or events is expressed, such expectation or belief is based on the current plans and expectations of our management and expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. Whether or not any such forward-looking statements are in fact achieved will depend on future events, some of which are beyond our control. The matters discussed in these forward-looking statements are subject to a number of risks, trends, uncertainties and other factors that could cause actual results to differ materially from those projected, anticipated or implied in the forward-looking statements. These factors include, among other things:

• our ability to achieve our strategic transformation;
• an accelerated decline in general print readership and/or advertiser patterns as a result of competitive alternative media or other factors;
• an inability to adapt to technological changes or grow our digital businesses;
• risks associated with the operation of an increasingly digital business, such as rapid technological changes, frequent new product introductions, declines in web traffic levels, technical failures and proliferation of ad blocking technologies;
• macroeconomic trends and conditions;
• competitive pressures in the markets in which we operate;
• increases in newsprint costs over the levels anticipated or declines in newsprint supply;
• potential disruption or interruption of our IT systems due to accidents, extraordinary weather events, civil unrest, political events, terrorism or cyber security attacks;
• variability in the exchange rate relative to the U.S. dollar of currencies in foreign jurisdictions in which we operate;
• risks and uncertainties related to strategic acquisitions or investments, including distraction of management attention, incurrence of additional debt, integration challenges, and failure to realize expected benefits or synergies or to operate businesses effectively following acquisitions;
• risks and uncertainties associated with our ReachLocal segment, including its significant reliance on Google for media purchases, its international operations and its ability to develop and gain market acceptance for new products or services;
• our ability to protect our intellectual property or defend successfully against infringement claims;
• our ability to attract and retain employees;
• labor relations, including, but not limited to, labor disputes which may cause business interruptions, revenue declines or increased labor costs;
• risks associated with our underfunded pension plans;
• adverse outcomes in litigation or proceedings with governmental authorities or administrative agencies, or changes in the regulatory environment, any of which could encumber or impede our efforts to improve operating results or the value of assets;
• volatility in financial and credit markets which could affect the value of retirement plan assets and our ability to raise funds through debt or equity issuances and otherwise affect our ability to access the credit and capital markets at the times and in the amounts needed and on acceptable terms;
• risks to our liquidity related to the redemption, conversion and similar features of our convertible notes; and
• other uncertainties relating to general economic, political, business, industry, regulatory and market conditions.

A further description of these and other important risks, trends, uncertainties and other factors is provided in the company's filings with the U.S. Securities and Exchange Commission, including the company's annual report on Form 10-K for fiscal year 2017. Any forward-looking statements should be evaluated in light of these important risk factors. The company is not responsible for updating or revising any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Non-GAAP Financial Measures

This press release also contains a discussion of certain non-GAAP financial measures that the company presents to allow investors and analysts to measure, analyze and compare its financial condition and results of operations in a meaningful and consistent manner. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in the tables accompanying this press release.

About Gannett

Gannett Co., Inc. (NYSE:GCI) is an innovative, digitally focused media and marketing solutions company committed to strengthening communities across our network. With an unmatched local-to-national reach, Gannett touches the lives of more than 125 million people monthly with our Pulitzer-Prize winning content, consumer experiences and benefits, and advertiser products and services. Gannett brands include USA TODAY NETWORK with the iconic USA TODAY and more than 100 local media brands, digital marketing services companies ReachLocal and SweetIQ, and U.K. media company Newsquest. To connect with us, visit www.gannett.com.

USE OF NON-GAAP INFORMATION

The company uses non-GAAP financial performance and liquidity measures to supplement the financial information presented on a GAAP basis. These non-GAAP financial measures, which may not be comparable to similarly titled measures reported by other companies, should not be considered in isolation from or as a substitute for the related GAAP measures and should be read together with financial information presented on a GAAP basis.

The company defines its non-GAAP measures as follows:

• Adjusted EBITDA is a non-GAAP financial performance measure that the company believes offers a useful view of the overall operation of our business. The company defines adjusted EBITDA as net income before (1) income taxes, (2) interest expense, (3) equity income, (4) other non-operating items, (5) restructuring costs, (6) acquisition-related expenses (including certain integration expenses), (7) asset impairment charges, (8) other items (including certain business transformation costs, litigation expenses, multi-employer pension withdrawals, and gains or losses on certain investments), (9) depreciation, and (10) amortization. The most directly comparable GAAP financial measure is net income.
• Adjusted net income is a non-GAAP financial performance measure that the company uses for calculating adjusted earnings per share ("EPS"). Adjusted net income is defined as net income before the adjustments we apply in calculating adjusted EPS, as described below. We believe presenting adjusted net income is useful to enable investors to understand how we calculate adjusted EPS, which provides a useful view of the overall operation of the company's business. The most directly comparable GAAP financial measure is net income.
• Adjusted diluted EPS is a non-GAAP financial performance measure that the company believes offers a useful view of the overall operation of our business. The company defines adjusted EPS as EPS before tax-effected (1) restructuring costs, (2) asset impairment charges, (3) acquisition-related expenses (including certain integration expenses), (4) non-operating (gains) losses, and (5) other items (including certain business transformation expenses, litigation expenses, multi-employer pension withdrawals and gains or losses on certain investments). The tax impact on these non-GAAP tax deductible adjustments is based on the estimated statutory tax rates for the United Kingdom of 19.0% and the United States of 25.5%. In addition, tax is adjusted for impacts associated with new tax rates in the U.S. Tax Cuts and Jobs Act. The most directly comparable GAAP financial measure is diluted EPS.
• Free cash flow is a non-GAAP liquidity measure that adjusts our reported GAAP results for items that we believe are critical to the ongoing success of our business. The company defines free cash flow as cash flow from operating activities as reported on the statement of cash flows less capital expenditures, which results in a figure representing free cash flow available for use in operations, additional investments, debt obligations, and returns to shareholders. The most directly comparable GAAP financial measure is net cash from operating activities.

The company uses non-GAAP financial measures for purposes of evaluating its performance and liquidity. Therefore, the company believes that each of the non-GAAP measures presented provides useful information to investors by allowing them to view our businesses through the eyes of our management and Board of Directors, facilitating comparison of results across historical periods, and providing a focus on the underlying ongoing operating performance of our business. Many of our peer group companies present similar non-GAAP measures to better facilitate industry comparisons.

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