tronc, Inc. (NASDAQ:TRNC) Q2 2016 Earnings Conference Call August 3, 2016 5:00 PM ET
Kimbre Neidhart - IR
Justin Dearborn - CEO
Terry Jimenez - CFO
Lance Vitanza - Cowen
Good afternoon and welcome to the tronc, Inc. Second Quarter 2016 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to Kimbre Neidhart, Assistant Treasurer, Investor Relations. Please go ahead.
Thank you and welcome to our 2016 second quarter earnings conference call. Before we begin, I would like to remind you that management will make forward-looking statements during the course of this call and our actual results could differ materially. Statements containing words such as may, believe, anticipate, expect, intend, plan, will, continue, estimate, outlook or other similar expressions are forward-looking statements. Differences in our actual results from those described in these forward-looking statements may result from actions taken by the company as well as from risks and uncertainties beyond the company's control.
Some of the risk and uncertainties that could impact our businesses are included in documents publicly filed with the Securities and Exchange Commission, including our annual report on Form 10-K and our quarterly report on Form 10-Q. I should also mention that our remarks today will include references to non-GAAP financial measures, including adjusted EBITDA, adjusted total operating expenses, adjusted net income, adjusted diluted earnings per share and we have provided reconciliations to the most comparable GAAP measures in our earnings press release, which is available on our website at investor.tronc.com.
Joining today's call is Chief Executive Officer, Justin Dearborn and Chief Financial Officer, Terry Jimenez.
Now, I would like to turn the call over to our CEO, Justin Dearborn. Justin?
Thank you, Kimbre, and thank you all for joining us to review our second quarter 2016 results. This is our first earnings call since we officially rebranded as tronc, and began trading on the NASDAQ Stock Exchange.
Rebranding of tronc or Tribute Online Content, and joining other technology companies on NASDAQ were two small steps in our long term strategy to transform to this publishing landscape, and create a sustainable business model.
Our objective is to maintain the highest integrity and value in our journalism, while harnessing digital tools to make our content more visual, enhance our ability to track and engage with our audience and offer exceptional journalism across every conceivable channel.
I'd like to begin today's call with a focus and the power of our journalism and by thanking all of our employees who do exceptional work across each of our publication. In June, after unprecedented stretch of gun violence and tragedy in Orlando, including the Pulse, nightclub shooting, the Orlando [press] [ph] worked tirelessly to uncover the truth and keep the public informed.
Many of our journalists showed up to work without being apt. Reporters and editors from other publication across the country offered additional feed on the street and contributions. And the entire Orlando staff worked around the clock to lead the nation in coverage. This tragic event and neither did it come before underscores the vital role our newsroom's playing community.
Additionally, each of our publications continued their outstanding work in public service with multiple investigated reports resulting in convictions and reform. Our award winning brands continue to be recognized for editorial excellence with several local and national awards, investigator reporting, spot news, sports and features.
Despite the distractions the company has faced over the last quarter and although our management team is still relatively new, we delivered strong financial results in the second quarter. We also raised our full year revenue and adjusted EBITDA guidance ranges today which Terry will discuss in a moment.
In the second quarter, tronc generated total revenue of $405 million down 2% from a prior year quarter. Excluding the San Diego Union-Tribune, total revenues were down 6% compared to the prior year quarter. This represents a sequential improvement from the first quarter of this year where total revenues excluding San Diego were down 7%.
We delivered adjusted EBITDA of $44 million, up 14% over the prior year quarter. Total advertising revenues were down 4% from the prior quarter and down 9% excluding the acquisition of San Diego Union-Tribune. This is an improvement from the first quarter of the year where total advertising revenue declines were in the low double-digit percentages.
troncX advertising revenue totaled $52 million in the quarter, up 7% from the prior year. tronc was also a founding partner and industry leader in new advertising initiative, Nucleus Marketing Solutions which officially launched on July 1. Nucleus is a premier network that reaches 90% of the nation and collectively has an impressive audience of 168 million.
Nucleus recently expanded its network adding nine new affiliates with leading media companies in top markets across the U.S. Nucleus provides the scale to gain traction with national advertisers in the area we have recently struggled and is expected to be revenue accretive in 2017.
We believe that our financial results demonstrate that organizational changes we completed in the first quarter of the year were effectively implemented. We are in the midst of an ongoing process to reorient the company with a more digital focus. Our content-first strategy is still in infancy and we continue to believe that there is tremendous upside opportunity with our content and platform.
We took several important steps in this quarter to build a strong technology foundation and driver transformational change while increasing adjusted EBITDA. We've completed phase one in building our new infrastructure for our content management system starting first in Los Angeles.
We replaced our legacy content editing solution with a home grown solution built by the newsroom for the newsroom that is more agile and significantly reduces production time. We also implemented a data solution design provided with unique insight into our audiences’ consumption habits and behaviors allowing us to better target our content and to be a more personalized in how we customize experience to our audiences.
As we learn more about the problems with our users, we can create premium opportunities for advertisers. To enhance our existing products, we completed our migration to Amazon AWS cloud solution which is improving performance across all of our sites and also reduces costs.
We promoted journalists and former managing editor of the Sun Sentinel, Anne Vasquez as our new Chief Digital Officer. Anne will ensure our content strategy retains the merit accruable and exceptional journalism while helping our individual brands to grow digitally and reach a wider audience through video, mobile and social.
Anne is also working with our newsrooms to help make our content more visual with video. Not only does our audience increasingly prefer video but the monetization of opportunity for [indiscernible] video is significantly higher.
We saw a strong momentum in other digital trends over the quarter with our digital audience growing to an all time high of 65 million at the end of June. Our average number of monthly unique visitors for the full quarter was 60 million, up from 56 million sequentially. That also translates to our digital subscription strategy. Total digital only subscribers reached 116,000 at the end of the second quarter up 15,000 or 15% sequentially from the first quarter and up 46,000 or 66% versus the prior year quarter.
At the beginning of Q2 we enabled all our print subscribers to enjoy unlimited free digital access. By the end of the quarter, 38% or 721,000 of our print subscribers had taken advantage of this complimentary digital benefit.
We went live meaning revenue producing of two large publisher partners using our AI solution at the end of the Q2 and saw significant improvements in their CMP rates which benefits us under the revenue share economics of the agreements.
Additionally, we see significant potential with our niche digital businesses like ForSaleByOwner. We’re investing in that platform to create more visible and powerful sale with more customization and personalization and improved user experience. We remain very bullish on ForSaleByOwner and expect this business to be material revenue and earnings contributor in 2017.
Also in the quarter media and technology executive Ross Levinsohn joined tronc as a special advisor. Ross will help us identify opportunities to enhance our content strategy, expand our digital platform to strategic partnerships and acquisitions and develop deeper engagement among our strong audiences.
Ross who previously severed as CEO of Yahoo! and president of Fox Interactive Media is widely known for involving legacy medial businesses and will be instrumental in helping accelerate our digital and commerce expansion.
We know that we have valuable brands, content and audiences that people want to engage with. We’ve significant opportunity to better leverage the digital content we’re creating and commend higher premiums for our valuable audiences. We remain intently focused on finding new ways to monetize our content and data using digital tools and technology to better serve our customers. We are confident that we have the right strategy in place and we’re taking these necessary steps to transform our business to support the work of our employees and create value for all our stakeholders.
With that I will turn the call over to Terry to provide an update on our financials. Terry?
Thank you, Justin. Good afternoon and thank you for your interest in tronc. I look forward to providing you an update on our earnings but before I do, let me explain our updated reporting structure.
In addition to the consolidated results we will also be discussing results under our new segment reporting. We've broken out our traditional publishing business from our digital businesses. Our traditional publishing businesses will be under the banner of troncM, M stands for media, activities included within troncM are revenue and costs associated with these paper direct mail and other print products. Our digital businesses will be presented under the troncX banner, and the X stands for exchange.
In addition to reporting at a segment level, we've also posted an earnings presentation to supplement the materials we provide to the investor community. We believe this will provide more color on our performance and we hope that it provides further transparency into our results.
Now let's first review consolidated results. We had a strong second quarter across all key metrics. Justin has already described our solid revenue performance for the quarter. In terms of expenses, consolidated Q2 operating expenses were $390 million, on an adjusted basis, adjusted total operating expenses came in at $336 million which is a reduction of $26.5 million over the prior year period.
Net income for the quarter was $4.1 million or $0.12 per fully diluted share. This income is not adjusted for restructuring and transaction costs. tronc generated adjusted EBITDA for $43.5 million in the quarter which show growth of 14% over the second quarter of 2015 and has brought our last full month adjusted EBITDA to $174 million.
We believe we ended the quarter with the strongest balance sheet since going public in August of 2014, as of June 26, we had $170 million of cash and that does not include $17 million of restricted cash. And throughout the quarter we reduced both our debt and pension liabilities. The strength in balance sheet positions the company to aggressively execute on digital initiatives and pursue strategic acquisitions.
Now I'd like to discuss performance of each of our reporting segments. troncM had $344 million total revenue which was down 3% year-over-year. Advertising revenue is down 7%, other revenue down 6% but those declines was partially offset by growth in circulation revenue.
Adjusted EBITDA for troncM was up $3 million or 10% on a year-over-year basis for the quarter as expense reduction that outpaced the revenue declines in the segment. troncX had $62 million of total revenue which was up 4% versus the prior year quarter. Adjusted EBITDA for troncX was flat in the quarter versus last year and this is impart due to some key investments we made in our troncX business.
We expect these expense investments to position the troncX segment for significant growth moving forward. Given the strength of our results we have new guidance for the full year 2016. We are increasing our revenue to a range of $1.61 billion to $1.63 billion and increasing the adjusted EBITDA guidance to a range of $170 million to $175 million for 2016. After strong first half we have a number of initiatives and programs and we believe we will continue to drive profitable growth moving forward.
I now would like to open the call for questions.
[Operator Instructions] And our first question comes from Lance Vitanza from Cowen. Your line is open.
Hi, thanks guys. A couple things, first, is it possible to breakout the EBITDA for Legacy versus the Union-Tribune acquisition in the second quarter?
Sure. The Union-Tribune in the second quarter - bear with me a second - it is about 6 million in the quarter but it was in for part of Q2 of 2015. So that contributed about 2.4 million of growth on a year-over-year basis.
Okay. And then so how does that compare to Q1 and I guess really what I'm trying to get at is I'm looking for help bridging from the $77 million of EBITDA I believe it was that you posted in the first half to the 95 million or so that you will be need in the back half to make the full-year guidance? And so I’m just really trying to get a feed on the core organic trends here on EBITDA?
So the organic trends on EBITDA we have grown in Q1, so if you back up San Diego and we saw a growth in Q2 as well organically.
Okay. So on an LTN basis you're actually, you're sort of in the middle of that adjusted EBITDA guidance range right now, is that right?
So now that you're - you are fully lapped the M&A, so in order to hit the guidance you really just need the core trends to remain sort of in line with what you've seen over the first half of the year, is that the fair way to think about it?
A –Terry Jimenez
Okay. Now that being said, just as I think about looking ahead and what's going to drive your ability to offset the secular pressure in print advertising, could you talk a little bit about seasonality in the back half of the year, the impact of digital I know you've done it qualitatively but any help that you can give us in terms of quantitatively on that and then also the Nucleus as well specifically in the back half of this year?
Sure. So I won't be able to give you specifics on - on the specific numbers that help you bridge. But I would say conceptually there is a few things happening. One is we've had a number of expense initiatives that have taken place and we’ll see that continue to benefit us as we balance out through the rest of this year. And so that’s where you see some of the organic growth.
The other layer of growth that comes in is on the digital side a number of the initiatives that we launched were really kind of in the beginning to middle of June there were some in May but primarily in June. And so we'll see some benefits of that as we go into Q3 and Q4.And those are really kind of the two components that that will be driving the offset on the legacy business.
That's helpful. And last question for me I guess, is the adjustments to EBITDA they fell in the second quarter versus the first quarter but we're still fairly elevated at 15 million or more than a third of your reported adjusted EBITDA. Can you give us a sense for what to expect on that line going forward, do you expect the add-backs will continue to fall and what kind of pace should we be thinking about there? Thank you.
So we won’t give specific guidance on that I’d say conceptually we had in the first quarter a larger charge than what we normally see on a ongoing run rate. That being said, we’re looking at a number of initiatives across real estate portfolio and some others. And so it may still be a little bit choppy but I would say Q1 is not necessarily indicative of what we’ve seen moving forward. Q2 may look a little bit closer to what we’ve seen moving forward.
Thanks for the help.
[Operator Instructions] This concludes today's Q&A session. I would now like to turn the call back over to Terry Jimenez, CFO for closing remarks.
Well, as you could see from the quarter we had built a strong foundation for growth moving forward. And we appreciate your interest in tronc, and look forward to speaking to you next quarter. Thank you.
Ladies and gentlemen, Thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Everyone have a great day.
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