August 4, 2016 Last Updated 8:11 am

Lee Enterprises third quarter ad revenue falls 8.6%, but cost cuts leads to flat net income

Newspaper publisher continues to pay down debt, leading to lower interest payments going forward

DAVENPORT, Iowa – August 4, 2016 — Lee Enterprises, Incorporated, a major provider of local news, information and advertising in 49 markets, today reported preliminary(1) earnings of $4.4 million for its third fiscal quarter ended June 26, 2016, or 8 cents per diluted common share. Earnings totaled $2.1 million, or 3 cents per diluted common share, the same quarter a year ago. Excluding unusual matters, adjusted earnings per diluted common share(2) totaled 8 cents, compared to 5 cents a year ago.

“As we anticipated, overall revenue trends improved from the second quarter, fueled primarily by a rebound in subscription revenue and a strong performance in digital retail advertising,” said President and Chief Executive Officer Kevin Mowbray.

“In the third quarter, subscription revenue was nearly flat, decreasing just 0.5%,” Mowbray added. “Digital retail advertising, which is more than 61% of total digital advertising, grew 8.3%. In total, digital advertising represented 24.1% of all ad revenue for the quarter.

“Adjusted EBITDA continues to be strong,” Mowbray added. “This has allowed us to reduce debt by more than $16.2 million in the third quarter, $85.6 million year to date and $104.7 million over the last twelve months.”

Other third quarter financial highlights include:

  • Overall revenue decreased 4.9%.
  • Total cash costs(2), excluding workforce adjustment costs, decreased 4.3%.
  • Digital services revenue, which primarily is driven by TownNews.com, increased 15.3% to $3.5 million, with total digital advertising and digital services revenue of $25.8 million, an increase of 6.2%.
  • Mobile advertising revenue, which is included in digital advertising, increased 22.2% and national digital advertising increased 15.8%. Total digital advertising increased 4.9%.
  • Lee’s share of EBITDA from MNI(3) and TNI(3) increased 6.5%.
  • Adjusted EBITDA totaled $36.9 million. For the last twelve months, adjusted EBITDA totaled $156.6 million.
  • As of June 26, 2016, the principal amount of debt was $640.3 million.

“Our aggressive debt pay down has resulted in significant reductions in interest expense,” said Chief Financial Officer and Treasurer Ron Mayo. “Interest decreased $2.3 million in the third quarter and $6.1 million year to date through debt repayment. Moving forward, we expect to direct all of this savings toward additional debt reductions as we continue to use all our available free cash flow to reduce debt.”

“Through improved efficiencies in production and other areas, we now anticipate cash costs for the full year, excluding workforce adjustments, to decline by 3.75% to 4.0%,” Mayo added. “Guidance from the previous quarter was 3.5% to 4.0%.”

Mayo also said that Lee continues its comprehensive real estate monetization program.

THIRD QUARTER OPERATING RESULTS

Operating revenue for the 13 weeks ended June 26, 2016 totaled $150.9 million, a decrease of 4.9% compared with a year ago.

Advertising and marketing services revenue combined decreased 8.6% to $92.3 million, with retail advertising down 6.9%, classified down 14.0% and national down 1.8%. Digital advertising and marketing services revenue on a stand-alone basis increased 4.9% to $22.2 million. Digital advertising represents 24.1% of total advertising revenue.

Total digital revenue, including digital advertising and digital services, was $25.8 million for the quarter, up 6.2% compared with a year ago. Our mobile, tablet, desktop and app sites, including TNI and MNI, attracted 24.5 million unique visitors in the month of June 2016, with 211.6 million page views.

Subscription revenue results improved over the March quarter decreasing only 0.5%, driven by our subscription rate and premium day pricing strategies.

Average daily newspaper circulation, including TNI and MNI and digital subscribers, totaled 0.9 million in the 13 weeks ended June 26, 2016. Sunday circulation totaled 1.3 million. Research in our larger markets indicates we continue to reach over 76% of all adults in the market through the combination of digital audience growth and strong print newspaper readership.

Operating expenses for the 13 weeks ended June 26, 2016 decreased 5.5%. Cash costs decreased 4.7%. Compensation decreased 2.1%, primarily as a result of reduced staffing levels offset in part by higher medical claims from our self-insured medical plan. Newsprint and ink expense decreased 11.0%, primarily the result of a reduction in newsprint volume and prices. Other operating expenses decreased 5.6%, primarily driven by lower delivery and other print-related costs offset in part with higher costs associated with growing digital revenue.

Including equity in earnings of associated companies, depreciation and amortization, as well as unusual matters in both years, operating income totaled $24.7 million in the current year quarter, compared with $24.8 million a year ago.

In the 13 weeks ended June 26, 2016, interest expense decreased 12.9% in the current quarter, or $2.3 million, due to lower debt balances. In addition, we recognized non-operating expense of $0.4 million in the current year quarter compared to $1.1 million in the prior year quarter due to the change in fair value of stock warrants issued in connection with our 2014 refinancing. We recognized $1.2 million of debt refinancing and administrative costs in the current year quarter compared to $1.4 million in the prior year quarter. The vast majority of the debt refinancing and administrative costs represent amortization of our refinancing costs paid in 2014.

Income attributable to Lee Enterprises, Incorporated for the quarter totaled $4.1 million, compared with income of $1.9 million a year ago. Adjusted EBITDA for the quarter was $36.9 million, a 6.0% decline from the prior year, and an improvement over the March quarter trend.

YEAR TO DATE OPERATING RESULTS

Operating revenue for 39 weeks ended June 26, 2016 totaled $466.2 million, a decrease of 5.3% compared with the 39 weeks ended June 28, 2015.

Advertising and marketing services revenue combined decreased 8.9% to $286.7 million, retail advertising decreased 8.2%, classified decreased 13.5% and national decreased 2.7%. Digital advertising and marketing services revenue on a stand-alone basis increased 6.0% to $64.3 million. Mobile advertising revenue increased 17.6%. National digital advertising increased 22.5%. Digital advertising represents 22.4% of total advertising.

Total digital revenue was $74.6 million year to date, up 6.6% compared with a year ago.

Subscription revenue decreased 1.1%.

Operating expenses for the 39 weeks ended June 26, 2016 decreased 5.5%. Cash costs decreased 5.0% compared to the same period a year ago. Compensation decreased 3.8%, due to a decrease in the average number of full-time equivalent employees of 8.2%, partially offset by higher self-insured medical costs. Newsprint and ink expense decreased 19.2%, due to a reduction in newsprint volume and prices. Other operating expenses decreased 4.2%.

Including equity in earnings of associated companies, depreciation and amortization, as well as unusual matters in both years, operating income was $79.8 million in 2016, compared with $82.6 million a year ago.

The change in non-operating income (expense) in the 39 weeks ended June 26, 2016 compared to the 39 weeks ended June 28, 2015 is primarily due to the $30.6 million gain on an insurance settlement. Additionally, interest expense decreased 11.0%, or $6.1 million, due to lower debt balances, and we recognized a $1.3 million gain on the extinguishment of debt. Partially offsetting those expense reductions, we recognized non-operating expense of $0.4 million in the 39 weeks ended June 26, 2016 compared to $0.3 million in the prior year period due to the change in fair value of stock warrants, and $4.6 million of debt financing and administrative costs were expensed in the current year to date period compared to $4.0 million in the prior year to date period. Debt financing and administrative costs are mainly amortization of costs paid as part of our refinancing in 2014.

Income attributable to Lee Enterprises, Incorporated for the year totaled $34.6 million, compared to income of $13.4 million a year ago.

Adjusted EBITDA for the 39 weeks ended June 26, 2016 was $116.6 million, a 5.4% decrease from the prior year.

Lee-Q2-16

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