New Media (NYSE:NEWM) Q2 2016 Results Earnings Conference Call July 28, 2016 11:00 AM ET
Sara Yakin - IR
Mike Reed - CEO
Gregory Freiberg - CFO
Kirk Davis - COO
Patrick Sholl - Barrington Research
Steve Salz - M Partners
Amy DeBone - Compass Point
Tommy Moll - Stephens
Good morning. My name is Amy and I will be your conference operator today. At this time, I would like to welcome everyone to the New Media Second Quarter Earnings Conference Call. [Operator Instructions]
Sara Yakin, IR, you may begin your conference.
Thank you, Amy, and good morning, everyone. I'd like to welcome you to New Media's second quarter 2016 earnings call. Joining us today are Mike Reed, New Media's CEO and President; Greg Freiberg, our CFO; and Kirk Davis, our COO of New Media.
I'd like to call your attention to the earnings supplement that was posted to New Media's website this morning. If you have not already done so, I would suggest that you download it now.
Briefly, before we begin, please let me remind you that statements made today are not historical facts and may be forward-looking statements. These statements, by their nature, are uncertain and may differ materially from actual results. We encourage you to read the forward-looking statements disclaimer in the presentation as well as the risk factors described in New Media's filings made with the SEC. In addition, we will be discussing some non-GAAP financial measures during the call today, and the reconciliation of those measures to the most directly comparable GAAP measures can be found in our earnings supplement.
Lastly, I would like to remind you that nothing on this call constitutes an offer to sell or solicitation of an offer to purchase any interest in New Media. The webcast and audio cast is copyrighted material of New Media and may not be duplicated, reproduced or rebroadcasted without our consent.
With that, I would like to turn the call over to Mike.
Thanks, Sara, and good morning, everyone. Thanks for joining New Media's second quarter earnings call. I'm excited to announce that our second quarter results marked the fourth consecutive quarter of improving same-store revenue trends and they increased nearly 200 basis points sequentially from Q1. As Sara just mentioned, we posted a supplement to our website this morning, and I will reference that throughout the call this morning.
And I'm going to start on page 2 of the presentation and give you a quick summary of the company. Today, New Media's portfolio of award-winning local media assets reach over 20 million people each week across 530 markets in 36 states. We own and operate 630 local publications and that includes 125 daily newspapers, the majority of which have been published for more than 100 years, and a few of which have been published for actually more than 200 years. Our publications are the long-standing dominant sources of comprehensive, high-quality news in the communities they serve, with local journalism representing the cornerstone of our business and our future. We are very proud of the work we do in this area. And in particular, we'd like to recognize one of our daily newspapers, The Columbus Dispatch, which was named the Best Daily Newspaper in Ohio's Best Journalism Contest.
Also, I just wanted to remind everybody and congratulate again our Sarasota Herald-Tribune and Michael Braga, who won a Pulitzer Prize just back in April of this year. Congratulations to these newsrooms and our newspapers in the great work they do. And as I said, congratulations to all of our newsrooms around the country and we're very proud of the work that we're doing.
As most of you know, these traditional local media businesses continue to produce significant recurring cash flows. And that's supported by the unique local content that we just mentioned, along with the local advertisings we run for businesses looking to reach consumers in these small markets. Further to that, we had an exciting and fast-growing digital marketing services platform, Propel, which we spent a lot of time on it in previous quarters and will discuss again later this morning.
Now let's turn to page 3 and look at the highlights for the second quarter of this year. Our Q2 revenue performance represents another solid quarter for New Media, with total revenues increasing 5.1% versus prior year and decreasing 3.2% on a same-store basis. When compared to Q1, same-store total revenues improved by nearly 200 basis points. Small tuck-in acquisitions contributed $6 million of revenue this quarter.
Excluding these acquisitions, our revenue was down 4.9% versus prior year on a completely apples-to-apples basis. And importantly, this represents nice improvement from down 5.4% last quarter on an apples-to-apples basis and down 5.7% in Q4 last year on an apples-to-apples basis. We are definitely moving quickly in the right direction.
Overall, the last several quarters, New Media has been committed to investing in both print and digital initiatives to drive its topline. And the improvement in our Q2 revenue trend conveys the momentum we're building towards achieving organic revenue growth by year-end 2017. Propel, our fast-growing digital marketing services platform, had another strong quarter, generating $12 million in revenue, which was up 53% versus prior year.
We're very pleased to see Propel continue to post large year-over-year growth rates even as it continues to scale and become a much larger business. We also have many new initiatives, some of which you'll hear about today, in place at Propel. And we expect these type of growth rates to persist in the future for Propel.
On the acquisition front. In the second quarter, New Media completed the previously announced acquisition of Journal Multimedia, a multi-title publisher of business journals, trade and consumer magazines, digital products and a very exciting research and events division. We bought this asset for $18 million.
We are also very excited to announce this morning that subsequent to the second quarter, we reached an agreement to acquire the Fayetteville Publishing Company for $18 million. The purchase price for both of these deals represents -- it actually falls into the valuation level that we've stated previously as our financial criteria and that's 3.5 times to 4.5 times the seller's EBITDA. Today, the company has a solid capital structure with net leverage at 1.8 times, slightly lower than our long-term target of 2 times EBITDA. We have over $100 million of liquidity, consisting of cash on the balance sheet and undrawn revolver. We remain committed to returning a substantial portion of our free cash flow to our shareholders in the form of a dividend. And with the declaration of our Q2 dividend of $0.33 today, New Media has returned a total of $2.82 in cumulative dividends to date over nine quarters.
Now let's turn to page 4 and take a little bit more of a detailed look at the Journal Multimedia acquisition. Today, the business is made up of the following assets; regional business journals that serve as the leading source of local business news in their respective markets; the Best Companies Group, a rapidly growing research division that partners with local businesses and media outlets to create Best Places to Work publications and events; regional and national magazines focused on parenting and the pet industry, respectively; and a digital marketing company that produces video and web services for SMBs.
As mentioned on our last earnings call, the acquisition of Journal Multimedia was extremely compelling as it allows us to further build out the B2B media business we created with the acquisition of The Dolan Company. Furthermore, we believe Journal Multimedia's print product subscribers are the ideal candidates for Propel services as they consist of SMBs that market themselves online to support and grow their businesses.
Journal Multimedia will be operated inside of our Dolan business publication platform, which will offer further synergy opportunities for this acquisition. As a reminder, we acquired the Dolan Company at the beginning of this year for a very attractive price. This gives us a business publication platform that we think offers compelling growth on two fronts; one, there are many business publications around the country that can be acquired, like Journal Multimedia at attractive valuations and two, we believe these publications offer a compelling growth case for Propel because of who their paying customers are, small businesses.
We are very excited about the new growth opportunity we have created for New Media this year in the B2B space with these small business acquisitions of the Dolan Company and Journal Multimedia and, particularly, around our ability to leverage Propel. You should expect to see more from us in the coming months in this part of our business.
As I just mentioned, subsequent to the quarter-end, New Media also reached an agreement to acquire the family-owned Fayetteville Publishing Company for $18 million in cash. And for an overview of that transaction, I'm now turning to page 5 of the supplement.
The Fayetteville Observer is the flagship newspaper of the Fayetteville Publishing Company. The Observer is 200 years old and the dominant source of local news and information in Cumberland County, North Carolina. First established in 1816, the Observer is the oldest newspaper still being published in the state of North Carolina and, today, has daily circulation of 36,000 and 45,000 on Sunday.
Over the years, the Fayetteville Publishing Company has been able to grow its array of products and services while continuing to maintain its community roots and produce award-winning journalism. In addition to the daily newspaper, the company's assets include multiple weekly and niche products ranging from military, community, and Spanish language, weekly and biweekly newspapers, to classifieds, a commercial printing division and even an annual guide for Fayetteville.
We are honored that the extended Lilly family entrusted New Media to carry on its tradition of providing quality news coverage and editorial content to Fayetteville and its surrounding region. And we are excited to welcome the Observer's employees and community into our growing company.
Since the start of 2016, New Media has announced and closed five deals and is on track to deploy nearly $95 million through the Fayetteville acquisition so far this year. And importantly, our deals meet our previously stated acquisition valuation criteria. We believe this demonstrates our commitment and ability to drive inorganic growth for our shareholders through smart, strategic and accretive acquisitions. Further, I am pleased to report that our pipeline for future acquisitions has become more robust over the past several months and we see tremendous opportunity to continue to deploy capital to create value for our shareholders.
Now on the organic side of the business, we have an exciting company in Propel that most of you know about, and let's turn to page 6 for an update on Propel. Propel is our national provider of digital marketing products and services for local businesses. It generated $12 million of revenue in the quarter, an increase of 53% to the prior year and 22.3% sequentially from Q1, highlighting the tremendous acceleration we're experiencing with Propel.
As mentioned on previous earnings calls, we believe the success Propel has experienced to date can be attributed to New Media's unique offering, giving us physical local presence, our full product suite, dedicated client services and experienced digital staff. On the business side, in the second quarter, we opened a new telesales center in Manchester, New Hampshire, which is now fully staffed with over 20 inbound and outbound sales reps. The center will allow us to scale into broader SMB categories in a profitable manner using our ThriveHive acquisition completed at the end of the first quarter this year. And that will be the catalyst for real expansion for Propel in the Manchester, New Hampshire call center.
As a reminder, ThriveHive is a unique, all-in-one software-as-a-service platform where small businesses get, one, automated and customized marketing recommendations; two, tools needed to act on those recommendations; and three, an easy-to-understand dashboard to track the results of those marketing actions. With this acquisition, ThriveHive expands Propel's digital marketing solutions offering to a large and mostly untapped segment, very small businesses.
Additionally, ThriveHive adds a new sticky and highly scalable subscription platform and adds retention marketing tools to Propel's portfolio. This dynamic platform can be adjusted to the changing needs of small businesses, allowing it to grow and evolve as the business matures. With our new telesales center, our ThriveHive acquisition and the large SMB presence we have in our markets across the country, we continue to see a terrific opportunity for Propel to expand its business.
Now let's take a quick look at the inorganic side of our strategy, and that's our acquisitions. And for that, I'm going to turn to page 7. Since inception, New Media has remained committed to acquiring dominant providers of local news in small to midsized markets with strong established brands at very attractive prices. To date, we have announced and closed 13 local media acquisitions plus one digital acquisition, ThriveHive, which I just mentioned.
Gross purchase price for these transactions is just over $685 million. Although two of these deals have been purchased using cash on our balance sheet and incremental debt on our term loan, we view these as our two primary sources of capital for future acquisitions as well. The acquisitions to date have been acquired at an average of 3.9 times the seller's LTM as adjusted EBITDA and unlevered yields of 24% and 31%, respectively, compelling returns; and those are before synergies.
Looking ahead, given the out-of-favor nature of the local print media market combined with the fragmented nature of the newspaper sector, we believe there continues to be a compelling opportunity for New Media to deploy capital, acquire great assets at attractive valuations. And further, as I mentioned a few minutes ago, our pipeline for these deals has improved over the past several months, so we're very encouraged by that. We continue to see meaningful growth and valuation upside for our shareholders coming from this part of our strategy.
Before I turn things over to Greg this morning, I just want to share some additional thoughts on where we are in the opportunity that lies ahead as we complete the second quarter of this year. If you bought shares in our company, New Media, at the end of the first day of trading on February 14, 2014, just over two years ago, as of last night, your total return is 73%.
That is pretty strong relative to a media sector where total returns are generally down over that same time period. That 73% return has been created through our three-pronged business strategy that we laid out for investors back in February of 2014. That strategy is, one, develop a digital and subscription business that turns a declining media business into one that grows its revenue and cash flow organically; two, deploy capital for acquisitions in the out-of-favor and fragmented local print media sector at very attractive valuations; and three, return significant portions of our free cash flow to shareholders in the form of a dividend. That strategy that's created 73% returns over the last two years remains intact today and is exactly the strategy we're executing on, including in Q2 this year.
In fact, we continue to execute very well against it. For example, on the organic side, I mentioned this earlier on the call, our apples-to-apples revenue is down 4.9% in the quarter. That's 80 basis points better than just Q4 last year. We expect to be revenue positive by the end of 2017. We have deployed nearly $100 million in capital for great acquisitions this year at very attractive valuation levels.
We have declared quarterly dividends of $0.33 each quarter this year. After the Q2 dividend is paid, we will have paid $2.82 in dividends in the past nine quarters. Also, the dividend is up 22% from our first quarterly dividend nine quarters ago. And we expect future growth in this part of our strategy as well as we execute on the first two pieces of the strategy.
We are focused on what is most important in driving growth for our shareholders in the near term and the long term. We are executing well against each of these areas, and you can see it in our numbers and our deals. We are really good at expenses and we have been for a long time. I ask you not to focus too much on the noise of one quarter's free cash flow which was impacted by some things that will not recur, as we have discussed today.
Again, we're really good at expenses. We see a tremendous opportunity ahead for us to continue to create value as we execute on the strategy that we've been executing on for the last two years; continued improvement towards organic growth, deploying capital at an accretive level for great acquisitions and returning significant portions of that cash flow in the form of a dividend to our shareholders. The future is bright. We've never been more excited.
And with that, I'll turn it over to Greg for a more detailed review of the financials for the quarter.
Thank you, Mike, and good morning, everyone. I'm going to be speaking to page 9 of the supplement. Total revenues for the quarter were $314.8 million, an increase of 5.1% to prior year on a reported basis and a decrease of 3.2% on a same-store basis. And as Mike mentioned earlier, Q2 represents the fourth consecutive quarter of improving same-store revenue trends, which is very exciting to see. Excluding the benefit of tuck-in acquisitions, total revenues were down 4.9% for the quarter, which improved 50 basis points sequentially versus last quarter, also very nice to see.
Total Print Advertising revenues decreased 10.2% on a same-store basis to $151.5 million, impacted by continued pressure on our Preprints, Local Print Advertising and Classified Print categories, which declined 11.2%, 10.8% and 7.8%, respectively. The anticipated declines in our Print Advertising revenues reflect the ongoing secular pressure these categories face. And specifically with Preprints, the decline continues to be driven by major retailers pulling back on frequency, seeking rate concessions and closing stores in our markets.
Digital has been a consistently growing revenue category for us and that continued again in Q2, with an increase of 6.7% on a same-store basis to $31.2 million. The primary driver of our strong revenue performance within Digital was our digital marketing services platform, Propel, which generated $12 million this quarter, an increase of 53% to prior year on a same-store basis.
We were very pleased to see Circulation, our single largest revenue category, at one-third of total revenues increase 2% on a same-store basis, driven by the use of technology to improve targeted acquisition and retention benefits. Lastly, Commercial Print and Other revenue increased 11.2% to prior year on a same-store basis, driven by stabilizing our commercial print and distribution performance and then adding on the benefit from new business initiatives, such as events revenue.
Operating income was $16.7 million, a decrease of $2.8 million to prior year. And net income was $9.4 million, a decrease of $1.8 million to prior year. As adjusted EBITDA and free cash flows decreased $2.3 million and $4.1 million to $40.1 million and $29 million, respectively. These categories were negatively impacted by $2 million of larger-than-expected health care claims in the current period and $1.2 million of new expenses tied to revenue growth initiatives.
We believe the additional health care expenses in the quarter to be non-recurring and importantly, that the $1.2 million of new expenses are for initiatives that we believe will deliver topline acceleration in the future. Furthermore, during the quarter, the company identified and implemented incremental expense savings to be realized over the second half of the year and these new expense reelections are not reflected in our Q2 run rate.
We ended the quarter with approximately $365 million of debt outstanding and have liquidity of $100.7 million, consisting of $60.7 million of cash on the balance sheet and $40 million of availability under our revolver. Net leverage against our Q2 pro forma as adjusted EBITDA is 1.8 times, slightly lower than our long-term target leverage of 2.0x.
In summary, we're very pleased with the performance of our company and in particular, our revenue results this quarter and believe they are a great indicator that the company's on the right path to achieve organic growth by the end of 2017. In the meantime, we believe the assets we own today, our capital structure, liquidity and robust acquisition pipeline position us well to be able to continue to execute on all aspects of our strategy.
Operator, we now like to open the call up for questions.
[Operator Instructions] Your first question comes from the line of Patrick Sholl with Barrington Research. Patrick, your line is open.
Good morning. Thanks for taking the questions. I was just wondering if you could discuss a little bit more on the initiatives that were part of the revenue growth within commercial printing?
Yes. So that category is actually Commercial Print and Other. There is a -- we actually signed some new commercial printing accounts, which accounted for a decent part of that growth. But we also have a -- an events division that we established a couple quarters ago, and we're starting to see some real results from that events division. So the events division actually showed $1.6 million of organic revenue growth versus prior year in the second quarter. So really, the two big initiatives that are new Commercial Print accounts on our presses and then the events revenue that we're driving with our new events division.
And then on -- I guess, with the addition of Dolan and then Journal Multimedia, you guys have added a lot more business-focused publications, as you mentioned. Are you kind of keeping that as -- at least the Dolan part, a sort of a separate business to, I guess, focus on its sort of its, I guess, somewhat different operational characteristics? Or I guess, how are you integrating those businesses to the larger print operations?
Well, it's a bit of a separate platform and we see a -- as I mentioned, we see a great opportunity to acquire more of these business publications. We are operating them as a separate platform from an operations and content standpoint. But we are integrating them into the rest of the mix with the company, particularly Propel. We see a tremendous opportunity for Propel to sell its products to the very customers of these business publications, who are small businesses, who are paying for these publications.
So we have an audience that's attentive because they're paying for the products. It's an audience that's desperately seeking help on the digital marketing side. And so they're ideal candidates for Propel. So it is a little bit of a separate platform. We have a separate management team operating the business.
We do see a good acquisition to grow through acquisition and then to grow through Propel. There's some integration with the rest of the company in terms of accounting, IT, HR, legal, so we'll see cost synergies as we integrate those parts of the business into New Media. But from an operations and content standpoint, they will be -- continue to be a separate platform.
Okay. Thank you.
Your next question comes from the line of Jason Bazinet with Citi. Jason, your line is open.
This is [Anders] [ph] on for Jason, actually. We just had a quick question on same-store revenue trends. So we understand that, sequentially, the down 5.1% from 1Q 2016 got better into this quarter to down 3.2%. But if we look at those trends on a year-over-year revenue basis, the down 5.1% was off a flat comp, and then the down 3.2% was off a down 3.5% comp. So if we add those two together, is it sequentially getting worse? Is that the right way to think about it?
Anders, it's Greg. And what I'd point out in the same-store revenue is that we have the benefit of tuck-in acquisitions where we do not adjust the prior period, and that's why we gave the all-in apples-to-apples numbers as well. And what Mike mentioned is, on an all-in basis, we had minus 4.9% in the quarter. And in Q1, that was minus 5.4%, right? So there's 50 bps improvement just there on an apples-to-apples basis. And even if you go back further, it was in the high minus 5% range in Q4 of 2016 and Q3 of 2016. So there's absolutely an improving trend.
Okay. Thank you.
Your next question comes from the line of Steve Salz with M Partners. Steve, your line is open.
So just on the year-end organic growth target next year, is the right number -- or the same-store sales number to look at, the apples-to-apples ex-tuck-in for the minus 4.9%, going to organic growth? Or is it the minus 3.2%, which includes the tuck-ins, going to organic growth by the end of next year?
It's the apples-to-apples, the minus 4.9% going towards flat and then organic growth by the end of next year.
Okay. And then a follow-up, I guess, given the sequential improvement, 50 bps, this quarter, that still something that's quite optimistic. I mean, is there anything fundamentally that we're missing maybe on what that step changes that would accelerate that sequential improvement in decline to get to flat same-store sales or growth?
There was actually three factors that will show acceleration as we get closer to the end of 2017. Number one is we have new divisions, such as our events division and our Dolan platform, that we didn't have historically that will lead to an improved apples-to-apples organic trend as the rest of this year and next year unfold.
Secondly, we've done some great things inside of Propel to continue to see large growth trends over prior year but off of a much larger base. So that large nominal revenue growth will have a broader or bigger impact on our overall apples-to-apples trends for New Media because it's just a much bigger piece of the pie.
And then third, the piece of the pie that's declining, our Print Advertising piece, continues to become a much smaller piece of the pie. So as you see all three of those dynamics converge, new business lines, a much larger Propel growing at the same rate it is today and a much smaller piece of the pie being print, you'll see the improvement in that kind of a trend that you're seeing just from Q1 to Q2 this year.
All right, thanks.
Your next question comes from the line of Amy DeBone with Compass Point. Amy, your line is open.
Hi, thanks for taking my question. So Propel grew, I think, like 70% in the fourth quarter, 70% in the first quarter of this year and then it dropped slightly to 54% this quarter. Where do you see the growth rate going after the ThriveHive and Propel telesales center expansion? And then when is that product offering expected to launch?
So the ThriveHive product offering is expected to launch late in Q3, so we should have the benefit of it in Q4. We would expect the revenue growth rates for Propel to continue to be north of 50%, depending on how quick the adoption is of the ThriveHive product. Also combined with the uplift we can see in Propel from the rollout in our business publications division, The Dolan Company, we would expect actually to see these revenue trends at least maintain above 50% but even -- we're even more hopeful that we see them actually grow back to where they were the last several quarters in the 70% range.
And then excluding the positive impact from Propel this quarter, what was the same-store digital sales trend?
Yes, we haven't given that number. But what I'd say is that it's actually going to be negative and that's because that's a maturing product set that we've put our emphasis around selling services as opposed to selling, for example, the digital display advertising. With that said, we have initiatives underway on our -- revitalizing our website using a third-party firm to make it a much more user-enhanced experience that we believe is going to give us an ability to improve that legacy metric.
And Amy, the thing I would add to that is that our digital customers are shifting dollars from a traditional print banner -- I mean, I'm sorry, from a traditional banner ad to the services platform that we offer with Propel. So the right way to look at digital for our company is in total because those customers are -- we're giving them a better solution with Propel than we did with a straight banner ad. And so the right way to look at it really is on a combined basis.
And then just last, can you provide us with the incentive income that was paid to Fortress this quarter?
It's going to be in our 10-Q, which will come out later today, but it's $3.5 million.
Okay. Thank you.
Your last question comes from the line of Tommy Moll with Stephens. Tommy, your line is open.
Good morning. Thanks for taking my questions. I wondered if you could give us any update on the pacing same-store for the current quarter in terms of local, classified and preprint, please?
It's a little bit too early for us to tell. We don't have a good-enough feel yet for how Q3 -- at that level of detail to individual print category. It's a little bit early for us to give guidance on Q3.
I think the Q1 number was actually a bit better than Q4 but still not.
He's asking about Q3.
Looking towards the guidance you've outlined for year-end 2017 to stabilize at the topline. Does that embed any kind of assumption about the traditional same-store comps getting better, getting worse, staying about the same?
I'm not I follow your question, but are you talking about on the print side?
So you've mentioned a few times today that, by the end of next year, you think total topline will stabilize on an organic basis.
Yes, apples-to-apples, right.
So in order to do that, are you assuming any improvement or weakening in the same-store comps for traditional revenues?
We are not. We are assuming that they continue on as they are right now, but they just become a smaller piece of the pie as we get towards the end of next year.
Got it. That’s helpful. Thank you.
This will conclude our conference call. You may now disconnect.
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