TEGNA reports strong earnings thanks to digital
The broadcast side of what was once Gannett, now a separate company named TEGNA, reported stronger Q3 earnings this morning. The reason, the company said, was growth in its digital segment, driven by the acquisition of Cars.com.
Gannett, like other newspaper companies, were partial owners of Cars.com, but Gannett, now TEGNA, swung a deal: the newspapers would get their interest bought out, and TEGNA would become the owner. The newspaper chains, which included McClatchy and Tribune, needed the cash, TEGNA wanted the future profits.
It’s worked out for TEGNA which reported a 17.6 percent rise in net income, driven by a nearly 72 percent rise in digital revenue.
Gannett, now solely in the newspaper business, and without its digital properties, will report earnings on Thursday. Gannett recently announced that it had acquired Journal Media, the newspaper company that was created with Journal Communications and EW Scripps merged their media properties, with Scripps taking on broadcast, and Journal Media becoming solely newspapers.
On Monday, Gannett was downgraded by Zacks from a “hold” rating to a “sell” rating.
Going forward into 2016, what will be useful to watch for is 1) can TEGNA grow digital year-over-year? and 2) what will Gannett’s debt and interest look like after its acquisitions?
Here is TEGNA’s earnings statement:
MCLEAN, Va. – October 20, 2015 — TEGNA Inc. today reported non-GAAP earnings per diluted share from continuing operations of $0.37 for the third quarter of 2015 compared to $0.29 for the third quarter of 2014. The 27.6 percent increase was driven by strong results in the Digital Segment. Digital Segment results reflect the acquisition of and substantially higher organic growth at Cars.com. Solid Media Segment results were impacted by the absence of $40 million of political spending that benefited the third quarter in 2014.
Gracia Martore, president and chief executive officer, said, “We are pleased that TEGNA has capped off its first quarter following the close of our separation on such a strong footing, with company-wide revenue up nearly 20 percent. TEGNA Media revenue continued its strong trajectory despite the absence of approximately $40 million in political spending in the third quarter of 2014 – which speaks to strong growth in retransmission revenue, online revenue and core advertising during the quarter. In TEGNA Digital, revenue increased substantially to more than $350 million – an increase of 72 percent – as we continue to generate strong organic growth at Cars.com while shifting CareerBuilder’s focus toward higher-margin software as a service solutions. We expect that the momentum we’ve seen this past quarter puts us in a very strong position as we continue to execute TEGNA’s more focused strategy going forward. Beyond this, we expect to see even greater impact as the nation’s political races begin to heat up into 2016.”
The results for the third quarter of 2015 and the year-to-date periods include results for Cars.com, which we acquired on October 1, 2014. The prior year periods do not include results for Cars.com, impacting the year-over-year comparisons.
On the first day of our fiscal third quarter, we completed the spin-off of our publishing businesses. The publishing businesses are now reflected as Discontinued Operations in our Statements of Income.
On October 2, 2015, we announced the successful completion of the sale of our corporate headquarters for $270 million to Tamares, a private investment group with holdings in the United States and Europe. In addition, we completed our CBS affiliate and DISH renewals. The outcome of each negotiation was consistent with the long-term plan we presented at our investor day in June of this year.
Company-wide operating revenues in the third quarter totaled $807.1 million, an increase of 18.5 percent compared to $681.0 million in the third quarter of 2015. Revenue growth of 71.6 percent in the Digital Segment primarily reflected the acquisition of and strong organic growth at Cars.com. Media Segment revenues were 2.4 percent lower as double-digit growth in retransmission revenue and digital revenue was offset by the absence of political spending that benefited the third quarter in 2014.
Net income from continuing operations attributable to TEGNA in the third quarter of 2015 was $90.6 million which includes a $6.0 million special tax credit. On a non-GAAP basis, excluding the tax credit, net income from continuing operations was $84.6 million, an increase of 24.1 percent compared to the third quarter in 2014.
Operating income totaled $216.4 million and was 17.6 percent higher than $184.0 million in the third quarter last year due primarily to the substantial growth in profitability in the Digital Segment. On a pro forma basis, non-GAAP operating income was up 7.4 percent. Adjusted EBITDA (a non-GAAP term detailed in Table 4) totaled $266.6 million, an increase of 22.2 percent. On a pro forma basis, the increase was 4.5 percent. The Adjusted EBITDA margin in the third quarter was 33.0 percent, an increase of 100 basis points compared to the third quarter last year.
Special items in the third quarter of 2015 primarily included a spin-related tax credit of $6.0 million ($0.02 per share). Special items in the third quarter of 2014 included $20.5 million ($0.07 per share) of non-operating expenses reflecting primarily spin and transaction-related costs.
Operating expenses were $590.7 million in the quarter compared to $497.0 million in the third quarter of 2014, an increase of 18.9 percent primarily reflecting the acquisition of Cars.com. Pro forma non-GAAP operating expenses were 1.8 percent lower compared to the third quarter in 2014 reflecting lower corporate expenses and a decline in Digital Segment expenses.
Corporate expenses for the third quarter of 2015 were $12.9 million compared to $18.2 million in 2014. The decrease was driven by the resizing of the company’s footprint. In addition, third quarter 2015 corporate expenses included the benefit of $1.8 million related to the elimination of depreciation resulting from the sale of the company’s McLean, VA headquarters. As previously disclosed, the annual run rate for corporate expenses is expected to be in the range of $55 million to $60 million by mid-2016.
Broadcasting Segment revenues totaled $406.4 million compared to $416.5 million in the third quarter of 2014. The 2.4 percent decline year-over-year reflects the absence of $33.9 million of net political spending which more than offset significant increases in retransmission revenue and online revenue as well as higher core advertising.
The following table summarizes the year-over-year changes in select Broadcasting Segment revenue categories.
Core advertising was up just over 1 percent in the quarter. Retransmission revenues totaled $109.0 million and were 18.6 percent higher compared to the third quarter in 2014 while digital revenues in the Media Segment were up 13.1 percent reflecting continued growth in digital marketing services revenue.
Media Segment operating expenses were $247.9 million, an increase of 3.9 percent compared to the third quarter of 2014 due, in part, to higher reverse network compensation. Operating income totaled $158.6 million while Adjusted EBITDA was $177.0 million.
Based on current trends, we expect to see growth in core advertising in the fourth quarter. However, the fourth quarter of 2014 benefited from a record $92 million of politically related advertising. As a result, we expect the percentage decline in total television revenues for the fourth quarter of 2015 to be in the mid to high-single digits due to the challenging year-over-year comparison.
Digital Segment operating revenues of $351.1 million were significantly higher in the third quarter, up 71.6 percent driven by the acquisition of and continued strong organic growth at Cars.com. On a pro forma basis, Digital Segment revenues grew 5.3 percent reflecting a mid-twenties percent increase in revenue at Cars.com.
Revenue growth at Cars.com reflects continued growth across all sales channels. Direct sales, on a pro forma basis, were up 11.4 percent reflecting an increase in revenue per dealer driven by new product sales. National revenue, primarily display advertising sold to auto manufacturers, was 13.8 percent higher due, in part, to strong growth in mobile traffic. Affiliate revenue increased 52.7 percent driven by higher wholesale rates that Cars.com charges its affiliates.
CareerBuilder revenue in the third quarter would have been up in the low-single digits excluding the impact of the strategic decision to reduce sales of certain lower margin advertising and services products to focus on more lucrative, long-term recurring software deals as well as unfavorable exchange rates. As a result, revenue from Human Capital Software Solutions was up 24.1 percent in the quarter. CareerBuilder revenue was 3.7 percent lower on a constant currency basis.
Digital Segment non-GAAP pro forma operating expenses were 1.3 percent lower in the quarter and totaled $278.6 million. Pro forma Digital Segment operating income was 42.0 percent higher and totaled $72.4 million. Adjusted EBITDA on the same basis totaled $103.5 million, an increase of 25.6 percent compared to the third quarter of 2014.
Interest expense totaled $66.9 million in the quarter, slightly higher than the third quarter of 2014, and reflects slightly higher average debt outstanding partially offset by a lower average interest rate.
Other non-operating expense on a non-GAAP basis in the quarter totaled $3.1 million compared to $0.8 million in the third quarter of 2014.
Net cash flow from operating activities was $183.8 million in the quarter. Free cash flow (a non-GAAP measure) totaled $163.9 million. Long-term debt outstanding was $4.47 billion and total cash was $117.8 million at quarter end. During the third quarter, we repurchased approximately 4.9 million shares of our outstanding stock for $125.5 million.