Welcome to the Lee Enterprise 2022 Third Quarter Webcast and Conference Call. The call is being recorded and will be available for replay beginning later this morning at investors.lee.net. A link to the live webcast can be found at investors.lee.net. Now, I'll turn the call over to your host Mr. Josh Rinehults, Vice President, Finance. Go ahead sir.
Thank you..
Good morning and thank you for joining us. Speaking on this morning's call are Kevin Mowbray, President and Chief Executive Officer; and Tim Millage, Vice President, Chief Financial Officer, and Treasurer. Also with us on today's call and available for questions is Nathan Bekke, Vice President of Audience Strategy.
Earlier today, we issued a news release with preliminary results for our third fiscal quarter of 2022. It is available at lee.net as well as at major financial websites. Please also refer to our earnings presentation found at investors.lee.net that includes supplemental information.
As a reminder this morning's discussion will include forward-looking statements based on our current expectations. These statements are subject to certain risks, trends, and uncertainties that could cause actual results to differ materially. Such factors are described in this morning's news release and also in our SEC filings.
During the call we refer to certain non-GAAP financial measures including adjusted EBITDA and cash costs which are defined in our news release. Reconciliations to the relevant GAAP measures are included in tables accompanying the release. And now to open the discussion is our President and Chief Executive Officer, Kevin Mowbray.
Kevin will open the conversation on Slide three of the earnings presentation for those following along. .
Thank you Josh. Good morning everyone and I'm pleased you could join us. I'm really encouraged at the pace by which we're transforming Lee into a vibrant and digitally-centric company. Our third quarter results clearly demonstrate we have the right strategy, the right team, and we're moving with velocity towards Lee's digital transformation.
With our third quarter results, we have exceeded many of our digital revenue metrics a whole quarter early and we are on track to achieve our full year adjusted EBITDA guidance of $95 million to $98 million.
In the third quarter, we reported 49% growth in Digital subscribers, 50% growth in Digital subscription revenue, and 74% growth in Amplified Digital revenue. For all three metrics, we exceeded our year-end guidance putting us a full quarter ahead of schedule.
This impressive performance is a testament to our operational efficiencies and our team's ability to execute on our strategic initiatives. Our Three Pillar Digital Growth strategy is the foundation of our investment thesis and the execution of the strategy is at the core of creating value for our shareholders.
Sustainable long-term digital revenue growth, from our Three Pillar initiatives, will transform the mix of our revenue base driving margin expansion, stronger free cash flow generation, which will fuel debt reduction, and enhance our balance sheet.
A stronger balance sheet and improved operating cash flow combined with multiple expansions fueled by increasing digital revenue creates a strong path to significant long-term value creation for our shareholders.
Our strategy leverages key -- these key strengths our local market expertise, our industry-leading digital revenue growth, and our commitment to the highest quality news to build a larger recurring revenue base and generate long-term top line growth.
This growth is expected to achieve $435 million of Digital revenue in 2026 and being driven by increased Digital subscriptions and increased Digital Advertising revenue. Our Three Pillar Digital Growth strategy is guiding our transformation to a vibrant and digitally-centric company.
We're focused on expanding our digital audiences growing our digital subscription base and revenue and the diversifying and expanding our offerings for local and regional advertisers.
Pillar one focuses on expanding digital audiences with investments in user experience, multimedia presentation format, and rich high-value content for driving higher engagement, outsize traffic, and monetization, leveraging our trusted brand's strong market position and in-house capabilities.
We continue to make investments that add significant value and drive additional growth. Pillar two is about the expansion of our base of Digital-only subscriptions and revenue by converting more of our vast addressable market to subscribers.
And it's paying off because we're the fastest-growing Digital subscription platform in local media and have been for 10 straight quarters. Digital-only subscriber growth continued at a rapid pace in the third quarter, up 49% over the prior year.
We now have 501,000 Digital-only subscribers exceeding our fiscal year end guidance a quarter ahead of schedule. At the same time, we're driving the increase in average rates for Digital-only subscribers, which were up 7% in the third quarter compared to the second quarter.
We're leveraging cutting-edge data and technology and expanded offerings from paid niche content on topics, where we have expertise and unique selling positions. These tactics are driving an increase in total subscribers and position us to achieve our goal of reaching 900,000 Digital-only subscribers by the end of 2026.
Reaching 900,000 Digital-only subscribers and increasing our average digital subscription rates are an important goal to Lee's digital transformation as increase of the base of our subscription-based digital revenue. Our third pillar focuses on diversifying and expanding offerings for advertisers and we're doing that in two ways.
First, through Amplified Digital, our full service and omnichannel digital marketing agency that provides local and regional advertisers with sophisticated custom solutions, including consulting, media buying and analytics. Second, by maximizing revenue opportunities on Lee's digital platforms.
Our owned and operated properties attract massive audiences. We're offering more video inventory and branded content opportunities to drive digital ad revenue. Both of these initiatives are supported by Lee's Vision platform. Vision is a proprietary sales enablement and execution software tool, powered by Amplified Digital.
Industry-wide omnichannel advertising for local advertisers is expected to continue its double-digit growth in the next two years. The Vision platform allows us to capture that significant growth in this category. And the Vision platform has transformed local advertising for Lee.
Our strategy and execution are expected to result in $435 million of recurring sustainable digital revenue by 2026. And with our third quarter results, we're more than half way there. We've launched our three-pillar digital strategy in early 2021.
We've made tremendous progress since the launch, including industry-leading growth in Digital subscribers and Digital agency revenue. Digital subscriber growth typically has outpaced our industry peers for the last 10 quarters and counting.
And as I mentioned earlier, Lee is the fastest-growing digital subscription platform in media with more than 500,000 digital subscribers, up 49% in the third quarter. Amplified Digital agency revenue is significantly outpacing the industry as well, reaching 69 percentage points ahead of our next closest industry peer.
As a result of our industry-leading digital growth, total digital revenue over the last 12 months grew to $224 million, up 24% compared to the prior year. We are rapidly changing the mix of our revenue. And in the third quarter, total digital revenue now represents 32% of our operating revenue. 2022 is shaping up to be a successful year at Lee.
We certainly have been presented with many challenges year-to-date.
And like the team has done, year-in and year out, we had to overcome many headwinds including supply chain shortages that impacted local and national advertising for much of the fiscal year, accelerated declines in demand for print advertising, choppy national advertising demand and significant inflation affecting all aspects of our cost structure.
But I couldn't be more proud of this team for their smart thinking, for the fantastic commitment for Three Pillar Digital Growth strategy and the rapid execution of our plans to add value for our shareholders.
The efforts of this team has driven substantial growth in digital revenue, putting us ahead of our plan on digital revenue targets and importantly, keeping us on track to achieve growing our full year guidance of adjusted EBITDA.
Our third quarter results clearly demonstrate the success of our Three Pillar Digital Growth strategy to transform Lee into a vibrant and digitally centric company. And now, I'll turn it over to Tim with more details on our results for the third quarter and the outlook for FY 2022..
Thank you, Kevin, and good morning everyone. To reiterate Kevin's sentiment, we're pleased with our third quarter results and the progressing digital transformation at Lee and are thrilled to report we have achieved our whole year targets on many of our digital revenue metrics ahead of schedule.
In the third quarter, total operating revenue was $195 million, down less than 1% to the prior year, as the growth of our Digital Revenue stream almost offset the decline in our Print revenue stream.
Total Digital Revenue increased 27% in the third quarter to $61 million, driven by rapid growth in Amplified Digital and in Digital-only subscription revenue. 32% of our revenue in the third quarter was Digital revenue, up from 25% a year ago. Digital-only subscription revenue increased 50% and totaled $11 million in the third quarter.
We now have 501,000 paid Digital-only subscribers, up 49% and that exceeds our year-end target of 495,000. As Kevin mentioned earlier, we remain the fastest-growing digital subscription platform in media, a title we have held for the last 10 quarters.
Digital-only subscription revenue over the last 12 months totaled $37 million, pacing well ahead of our full year target of $33 million. Digital Advertising and Marketing Services revenue reached the inflection point and now represents 51% of our total advertising and marketing services revenue in the third quarter.
Digital Advertising revenue increased 27% and totaled $46 million in the quarter. Amplified Digital, our full service digital marketing solutions agency fueled the growth with revenue of $20 million -- $21 million in the quarter, up 74%.
Amplified Digital revenue totaled $66 million over the last 12 months, exceeding our fiscal year-end estimate of $65 million. Total Print revenue was $134 million in the quarter, a 10% decline compared to the same quarter a year ago, due to continued secular declines and supply chain constraints affecting national advertising.
Operating expenses totaled $190 million and cash costs were up 1%. Increases in cash costs were attributed to strategic investments in digital talent and technology tied to our digital growth strategy, increased digital cost of goods sold and general overall increase in prices due to the inflationary environment.
Lastly, net income totaled $0.2 million and adjusted EBITDA totaled $23 million in the third quarter. As Kevin mentioned earlier, we faced a number of headwinds so far in fiscal year 2022, including dealing with rising prices that are impacting our cost structure.
For example, newsprint prices increased several times in the fiscal year, in total a 30% increase that will have a $4 million to $5 million annualized impact on our cost structure. And that's just one example.
One way we are addressing this, is we are focused on managing the profitability of our Print business as secular changes affect the demand for these products and services.
As we discussed last quarter, early in the third quarter we completed a 14-week deep dive into all aspects of the Print organization, optimizing our cost structure and distribution, manufacturing, national content, marketing, finance, IT and other corporate services.
This process evaluated our external spending as well as human capital and was done to better align our cost structure with our long-term strategy. As a result of this review, we executed on expansive actions that we expect to reduce the cash cost on an annual basis by $45 million.
Execution on these various actions began early in the third quarter and we are on track to achieve more than $20 million reduction to our cost in the last two quarters of FY 2022.
While we remain focused on maximizing our efficiencies and reducing the cost structure of our legacy Print business and growing process, our main priority is to drive long-term sustainable digital revenue growth. We aim to invest in areas that are aligned with our 3 Pillar Digital Growth strategy.
Local content, development of our digital products and digital talent to drive results are the key investment areas for Lee in this fiscal year, as well as throughout our digital transformation. This year we expect $36 million of incremental investments in our strategy.
These investments will have a short-term impact on our margin profile, but are expected to have a great return and drive Lee's digital transformation.
As we mentioned earlier, our solid digital revenue growth in the third quarter resulted in us achieving our previously communicated year-end guidance for digital subscriptions, digital subscription revenue and total digital revenue a quarter early.
We wanted to provide some additional thoughts on our fourth quarter expectations as we finish our fiscal year in September. We expect continued growth in digital-only subscribers, earning $11 million in revenue in the fourth quarter. This will result in $39 million in digital-only subscription revenue for the fiscal year.
On the Advertising side, we expect $47 million of digital advertising and marketing services revenue in the fourth quarter, with about $22 million of that coming from Amplified Digital. For the fiscal year we expect $179 million of digital advertising and marketing services revenue and more than $75 million of Amplified Digital revenue.
Both of these expectations are improvements from our previous outlook. From a cash flow perspective, we are reaffirming our full year adjusted EBITDA guidance of $95 million to $98 million, which results in fourth quarter adjusted EBITDA of $29 million to $32 million or 13% to 25% over the prior year.
Our results through the first three quarters of the fiscal year combined with the tactics we continue to execute, give us the confidence to improve our expectations for many of our digital revenue metrics and to reaffirm our adjusted EBITDA outlook. Moving to the next slide.
The principal amount of debt at the end of the quarter was $463 million, down $113 million since our refinancing in March of 2020.
As a reminder, our credit agreement with Berkshire Hathaway, our sole lender, has favorable terms that are incredibly important for us, as we execute our strategy, as it allows us the ability to make the necessary investments in talent and technology that fuel our recurring sustainable revenue growth.
Our pensions are in the aggregate overfunded, so we do not expect any pension contributions in the fiscal year. Finally, we continue to identify opportunities to monetize our real estate, which facilitates accelerated debt repayment.
We generated $25 million of proceeds from asset sales over the last two years and have already closed $14 million of real estate in the first nine months of the year. As a reminder, our goal is to achieve our long-term leverage target of under 2.5 times by the end of 2026.
As we have shared in the last two quarterly calls, we are providing metrics to give better transparency and clarity on our digital transformation progress. This table summarizes our improved fiscal 2022 outlook, demonstrating our progress towards our 2026 goals.
As you can see we are making significant continued progress on our digital transformation and we expect this to continue over the next several years.
We have already established a strong track record for accelerating Digital subscription growth and with the planned incremental investments in talent and technology we're on track to reach our goal of 900,000 paid Digital-only subscribers in 2026.
Continued execution of that strategy is expected to generate recurring, sustainable digital subscription revenue exceeding $100 million. Amplified Digital's dramatic growth trajectory is fueling our five-year Digital Advertising outlook.
Our Vision platform immediately positions us to capitalize on double-digit growth in omnichannel digital advertising. With advanced data-driven ad tech specialized category expertise, scalable custom video content and powerful first-party data access Amplified Digital is a strong partner for local and regional businesses looking to drive growth.
We expect to reach $310 million of annual digital advertising revenue by 2026 of which, about $200 million will come from Amplified Digital. Total Digital revenue is expected to be $435 million in 2026. And with that, I'll turn it back to Kevin, to wrap-up..
Thanks Tim. Under the guidance and oversight of the Board of Directors our leadership team's continued execution of our growth strategy sets the stage for significant long-term value creation. We're very pleased with our third quarter results and the progress we're making towards the target in our Three Pillar Digital Growth strategy.
The strong presence as the trusted source of information in the communities we serve, combined with cutting-edge digital capability is the foundation of our digital transformation.
The success of our transformation is reflected in the continued rapid growth of our Digital subscription Digital-only audience revenue and Digital Advertising and Marketing Services results. To wrap-up, I'd like to thank the entire Lee team, for their efforts in driving our transformation.
We have the right Board, the right team and the right strategy. And I believe we're better positioned than ever to create long-term value for our readers, users, advertisers and shareholders. This concludes our remarks. The team will remain on the line for any questions you may have. Operator, please open the line for questions..
Thank you. At this time, we will be conducting a question-and-answer session. .
Hi. This is Mike Kupinski. I just have a couple of questions. First of all, I want to congratulate you on your quarter. I mean, you did a great job. And then, also the guide for Q4, I can't tell you, how much of a relief it is to hear someone actually beating my expectations for the quarter in this environment.
A couple of questions, your guidance on Amplified is, obviously a little better than what I was looking for. It seems like and maybe correct me if I'm wrong, that you're anticipating almost 80% -- over 80% growth in Amplified in Q4.
Can you talk a little bit about the progress you've had with Amplified? What you're seeing with the customers? What they're talking about? Why you're seeing such very strong growth? And just give us a little color there. And I have a couple of other follow-up questions..
Yeah, I'll start and anybody that wants to add to can too.
I think the key to our success is the Vision platform we've talked a lot about on a couple of calls, really gives the local sales reps the ability to create an omnichannel marketing campaign for an advertiser really with the push of a button and in real-time generate a pretty sophisticated campaign.
I know we've got the analytics to backup of that campaign that drives results for advertisers. And what we're finding is strong retention at the local and regional advertising level, because of the success of what the campaigns deliver for the advertisers..
Got you. And you obviously implemented some cost reductions in the quarter.
I was just wondering, when did, those actually start like what month and when we will start cycling against those? And where did most of the cost cutting come from? If you can just give us a little color on that?.
Yes. So we made a number of actions throughout the third quarter. They began in April, a lot them took place in May. So really it effectively -- really the entire organization in terms of -- in terms of departments worked for the cost structure. I think the one thing that I could say that the focus was on the Print revenue streams.
Anything that supports the Print revenue streams was our focus as we continue to drive profitability as those revenue streams continue to mature. A significant area of cost reductions were looking at our real estate portfolio -- looking at the cost price to distribution of our print products and other areas like that.
One area where we want to remain focused on investing is areas like local content generation, digital product development those areas those are our, sort of, the areas where we're really focused on continuing to invest, but at the same time focused on driving profitability of different products by managing costs. .
Thank you. And the Digital-only subscribers you mentioned the rates were up 7%.
What is the average rate now? And then can you talk a little bit about if there were any particular promotions, changes in promotions, decreases in promotions, increases in paywall, things like that that may have accounted for not only the rate growth, but the growth you saw in Digital-only?.
In terms of the rates, I can comment on the range. So we're a little under $7 a month for Digital-only subscriptions. And so we're continuing to focus on using data to drive our decisions on go to market on how we market our product and it has been successful. .
And then my last â I am sorry. .
I wanted to say, Michael one of the great things about that is that's a very high-margin piece business for us..
Right. And I was just going to ask about the margins. And the key thing here obviously in driving your cash flow growth will be to improve Digital margins.
Can you talk a little bit about your expectations of margins and expansion as you kind of go into fiscal 2023?.
Yes. Yes, I can do that.
So we were -- we came into 2022 with our ad revenue with respect to what we were thinking in terms of margin and the impact of making the digital investments that they would have that have a short-term temporary impact on our margins, but we do expect as we move into the latter part of 2023 and into 2024 that we will start to see some margin expansion as we get returns on those investments we're making.
.
Okay. Great. Well, congratulations again. Thank you. Thatâs all I had..
Well, that's was -- lots of questions. I really appreciate your interest in Lee and thank you for joining us on today's call..
Thank you. Ladies and gentlemen, at this time we have reached the end of our question-and-answer session. This concludes our call. .