Stacy Cunningham - Vice President, Financial Planning and Investor Relations Bob Dickey - President and Chief Executive Officer Sharon Rowlands - President, USA TODAY NETWORK; Marketing Solutions and Chief Executive Officer, ReachLocal Alison Engel - Chief Financial Officer and Treasurer.

Douglas Arthur - Huber Research Company.

Good day, ladies and gentlemen, and welcome to the Third Quarter 2018 Gannett Company Earnings Release Conference Call. At this time, all participants are in a listen-only mode. And later, we will conduct a question-and-answer session and instructions will follow at that time.

[Operator Instructions] And as a reminder, this conference is being recorded. I would now like to hand the call over to Ms. Stacy Cunningham. You may proceed..

Thank you. Good morning, everyone, and welcome to Gannett's Third Quarter 2018 Earnings Conference Call. As a reminder, this call is being recorded and webcast.

Joining us today from Gannett are Bob Dickey, President and Chief Executive Officer; Ali Engel, Chief Financial Officer; and Sharon Rowlands, President of USA TODAY NETWORK, Marketing Solutions and Chief Executive Officer of ReachLocal.

Before we begin, I would like to call your attention to our Safe Harbor provision for forward-looking statements in our financial results press release. The Safe Harbor provision identifies risk factors that may cause actual results to differ materially from the contents of our forward-looking statements.

For a more detailed description of the risk factors that may affect our results, please refer to our financial results press release and our SEC filings, including our 2017 Form 10-K. Also, during this call, management's commentary will include non-GAAP financial measures.

Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in the tables of our financial results press release, which we have been posted into our Investor Relations website at investors.gannett.com. With these formalities out of the way, I'd like to turn the call over to Bob Dickey..

Humankind, Animalkind. Militarykind; have reached over 4 billion video views year to date on Facebook. In the third quarter, 17 kind videos went viral, with more than 10 million views. And I'm pleased to report in August we delivered our best monthly Facebook revenue from our kind franchises.

In the quarter, we also redesigned our video player, driving improved usage and monetization with 20% to 30% higher completion rates for both ads and content, as well as extended our video content to the Alexa Show device. Other consumer related product efforts in the quarter centered around in-app personalization and a new desktop front redesign.

We introduced more suggested content into USA TODAY's native applications, based on users' behavior and location, and have seen strong engagement rates with this personalized content.

During the third quarter, our new desktop front redesign aimed at driving engagement and newsroom efficiencies via more automated curation was launched across our top 25 markets. Finally, I wanted to highlight a new offering within our content ventures group, The City.

It's a new long-form investigative podcast about the hidden power structures of American cities, centered on Chicago for Season 1. The podcast launched on September 24 with an industry-first augmented reality trailer, and quickly reached number 6 on the Apple podcast top 10 charts.

In just its first few episodes, The City has achieved 0.5 million downloads, and the completion rates are over 90%. We are excited for this early success and its potential beyond our traditional distribution channels.

To sum up, we have a highly differentiated set of assets, a strong global team, and the recent digital acquisitions we have made are performing well. We're making strong progress in our transition to digital, but the path to that goal will not always be smooth.

We are taking prudent steps relative to our expense structure and are focused on a strong future for Gannett. With that, let me turn it over to Sharon for ReachLocal highlights for the quarter..

reach, engagement or contact; and then have our technology platform automatically optimizes spend to achieve their specific goal. Shifting gears to WordStream, we're very excited about this acquisition, which is given as a strong leadership team and then exceptional product offering.

During the quarter, WordStream became a batched Facebook marketing partner and launched a new business center aimed at the agency channel. We're also proud they were named to the Entrepreneur Magazine, 2018 Top Company Cultures List. We started to work on a number of synergy areas.

To begin, we identified the first digital solutions that are a fit for the WordStream client on prospect base, mainly our listings and reputation management product. Our plan is to have these integrated and launched in the first quarter of 2019, yielding incremental growth and delivering more value to WordStream clients.

Second, we've began training our Gannett local SMB call centers on the WordStream platform, so that we can drive lead from this large audience to WordStream, when the client is looking for a do-it yourself solution.

And thirdly, we have a data science team working on analyzing campaign performance data from WordStream and ReachLocal to identify key learning to feed back into machine learning across both organizations in our technology platform.

Looking ahead to the fourth quarter, we're focused on accelerating the growth of our talent capabilities and execution within our publishing segment to drive stronger sales performance, especially within digital.

Within our ReachLocal segment, we focused on new client acquisition and keeping the foot on the pedal in our product organization to continue to build industry leading integrated solutions. With that, let me turn the call over to Ali..

Thank you, Sharon, and good morning, everyone. One quick housekeeping item to start. Our third quarter of 2018 had 92 days, while the third quarter of 2017 had 91 days. The extra day this quarter was a Sunday, which is our highest revenue day. We estimate the extra day accounted for approximately $11 million in revenue and $7 million in adjusted EBITDA.

Looking to the fourth quarter, as a reminder, we will have six fewer days as compared to last year's fourth quarter. Consolidated revenues were $712 million compared to $744 million in the third quarter of 2017.

The revenue decline reflects the challenge of print advertising and single copy circulation environment, partially offset by the WordStream acquisition, full access subscriber pricing initiatives, and digital advertising and marketing services revenue growth. On a same store, day adjusted basis, total revenues declined 8.1% in the third quarter.

Total digital revenues of $266 million, grew 8% in the quarter and represented 37% of total revenue, up from 33% a year ago. Our total digital advertising and marketing services revenues of $199 million in the quarter rose 8% and reached 49.4% of total advertising and marketing services revenues, nearly hitting the 50% milestone.

Adjusted EBITDA totaled $70 million for the quarter, down 5% from last year. The addition of WordStream and solid growth that our ReachLocal segment did not entirely offset the revenue pressures within the Publishing segment.

Total same store, day adjusted operating expenses fell approximately 7% year-over-year, reflecting production and distribution savings due to facility consolidations and lower payroll and benefits expenses.

These productions were offset in part by higher expenses and our ReachLocal segment associated with higher revenues, and for the first time in years, an increase in same store newsprint expense of 11%, reflecting newsprint pricing pressures largely related to tariffs.

Additionally, we incurred higher bad debt than anticipated in the quarter, reflecting several major retail bankruptcies. Turning to the Publishing segment, as we have discussed, we were disappointed with our revenue results, which were down 9% on the same store, day adjusted basis.

Specifically our same store, day adjusted digital advertising and marketing services revenues grew only 1% in the quarter, after first half growth in the 6% range. Digital marketing services revenues continue to be a bright spot, up 42% year-on-year on a same store, day adjusted basis.

Our client counts and average revenue per client both showed solid growth year-over-year. Within digital media revenues fell 1.7% on a same store, day adjusted basis with a strong national performance offset by weakness at local, which Bob discussed.

At national, both our premium and programmatic channels delivered strong results and our strongest categories were auto, technology and financial services. As expected, digital classifieds continue to negatively impact our overall digital advertising and marketing services result, although they did show some improvement from the second quarter.

The employment category continues to be our weakest. If you were to exclude digital classifieds and the after mentioned unprofitable affiliate business from last year, publishing segment digital advertising and marketing services revenues were up 10% on a same store, day adjusted basis in the quarter.

Same store, day adjusted print advertising revenues fell 20% in the quarter as expected. We continue to see some of the largest declines from our national pre-print advertisers, and within the auto and employment areas of print classified.

Switching to circulation, on a same store, day adjusted revenue trends improve to down 4% better than second quarter trends. Our U.S. local markets delivered the best results with revenues down only 3%, because of our full access subscriber per pricing initiatives and several new premium additions in the third quarter.

Single copy trends at both USA today and within our local markets remain weak, as expected. Digital only circulation volume growth remained robust in the quarter of 49% year-over-year to $472,000, as we are aggressively targeting new digital subscribers via new marketing tactics as previously discussed by Bob.

Turning to our ReachLocal segment, third quarter revenue reached $110 million, up 17% year-over-year driven by the addition of WordStream and solid organic growth offset by the divestiture of our European business and $1 million negative impact of the fair value adjustment to WordStream's deferred revenue.

On a same store, day adjusted basis ReachLocal segment revenues grew 8%, we continue to see strong growth in average revenue per client, as the number of products per client continues to grow. As expected we did close on the sale of our business in Japan in early October.

The ReachLocal segment delivered another strong adjusted EBITDA margin reaching 16%, up from only 6% in the year ago quarter. There are several factors driving the margin performance. First, we are seeing strong growth in average revenue per client driven by an increasing number of products per client, and a strategic focus on higher spending client.

This growth in ARPU is driving scale within our sales and support cost. And secondly, the addition of WordStream added approximately 4 percentage points to the margin in the quarter.

We are very pleased with the strong margins, but also mindful of the need for investment to deliver continued revenue growth, so we will be careful to monitor this balance.

Our GAAP net income for the quarter was $13 million, down from $23 million a year ago reflecting the year ago tax benefit of $20 million that resulted from the tax write-off of worthless stock and debt in certain ReachLocal foreign entities.

Turning to the balance sheet, we ended the quarter with $338 million in debt, including our convertible debt and $170 million drawn on the revolver. Our cash balance was $109 million at the end of the quarter, resulting in net debt of $229 million.

Capital expenditures totaled $16 million for the third quarter, reflecting investments related to digital product development as well as product - projects supporting our ongoing facility consolidations. There were no shares were purchased this quarter and we paid $18 million in dividends. Turning to our full year outlook.

We are lowering our revenue guidance to $2.9 billion to $2.94 billion, and our adjusted EBITDA outlook to $325 million to $330 million largely reflecting the softer than expected digital advertising and marketing services revenues within our Publishing segment.

In the Publishing segment, we expect fourth quarter revenue declines to be similar to the third quarter with the exception of circulation revenues, where we anticipate modest improvement due to higher premium edition pricing and some selectable access pricing initiatives.

In the ReachLocal segment, we're anticipating continued revenue growth driven by the addition of WordStream offset by the divestiture of our European and Japanese operations and another quarter of double-digit margins albeit more modest than third quarter levels.

Considering the revenue challenges and the need for continued investment in our digital future in the fourth quarter we are instituting an early retirement program, and have announced two outsourcing initiatives within customer service and technology.

We anticipate that these initiatives will have significant benefit on our overall cost structure in 2019, but we will not have clarity on the expected savings from the early retirement program until December.

While we are disappointed with the weaker-than-expected digital advertising and marketing services revenue results, we believe we are making the right strategic moves with our sales reorganization, new product development and increased focus on digital subscribers that will further propel our digital transformation over time.

With that, I will turn it over to the operator for questions..

Thank you. [Operator Instructions] Our first question comes from the line of Doug Arthur of Huber Research. Your line is open..

Yeah, thanks. Still trying to break everything down here. Just two detail questions.

Ali, do you have an update on the pension liability?.

We have I think a significant change in the third quarter. We'll have, obviously, at the end of the year, where we update the discount rate and all the assumptions, that will be more meaningful, Doug. But have a material or significant change in the third quarter.

And we'll file our Q later - we'll file our 10-Q later this afternoon that will have all the detail associated with it..

Okay. And then, on the digital subscriptions, I mean, it looks like - well, the number is still somewhat small, 472,000.00. The growth accelerated certainly sequentially. Is there anything to read into that? You mentioned some different initiatives in terms of the meter, et cetera.

Is that on track of what you expected?.

Hey, Doug. It's Bob. The side-door - closing the side-doors and tightening some of the meters, plus we are just - every day, every week, every month, we're getting much more sophisticated in our marketing as we test various things. We're getting better with pricing, with better sales channel, et cetera.

Also the team, our newsrooms continue to contribute in a big way, both with just doing an excellent job of communicating with our readers about the content that we are providing, the great journalism we are providing. And we're just consistently doing a better job of targeting that content. So we're seeing engagement improvements.

As you saw, our overall uniques were better than the peer group. So it's a combination of really Nicole Carroll and Maribel really getting in the news organization coming along. And Andy and his team are just getting smarter on how to market on the digital side.

So we think that what you saw in the third quarter is a great indication of a very positive trajectory for 2019 as well..

Yeah, does the growth in the mix of that number skewed toward the larger markets, I assume?.

It does. Yeah, we're seeing some really nice pops in markets like Milwaukee, Phoenix, Indianapolis, Nashville, so we're happy about that. We also have some of our small and midsized communities that are very tech-savvy like a Fort Collins, college university town, actually outperforms for a market its size in the number of digitals.

But you're right, it is coming. The bigger numbers are coming from our larger markets, which is where we really put our focus..

Okay. Great, thank you. I'll jump back in queue..

Thanks, Doug..

Thank you. [Operator Instructions] And at this time, I'm showing no further questions. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day..