Business context and reporting period
Gannett Co., Inc. (NYSE: GCI), whose portfolio includes USA TODAY and the USA TODAY NETWORK, filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2023. Its businesses are Gannett Media, Digital Marketing Solutions (LocaliQ), and Corporate and other.
Financial and operating performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $652.9 million | $717.9 million | $1,994.1 million | $2,214.6 million |
| Operating income (loss) | $34.9 million | $(25.1) million | $68.4 million | $(48.3) million |
| Net loss attributable to Gannett | $(2.6) million | $(54.1) million | $(4.9) million | $(110.8) million |
| Loss per diluted share | $(0.02) | $(0.39) | $(0.04) | $(0.81) |
| Adjusted EBITDA (non-GAAP) | $59.5 million | $51.9 million | $193.6 million | $166.9 million |
Revenue declined 9% in Q3 and 10% for the nine-month period. Q3 operating margin was approximately 5.3%, compared with negative 3.5% a year earlier; nine-month operating margin was approximately 3.4%, compared with negative 2.2%. Adjusted EBITDA margin was 9.1% in Q3 and 9.7% for the nine months, versus 7.2% and 7.5%, respectively, in 2022. Adjusted EBITDA is a company-defined non-GAAP measure and should be considered alongside GAAP results.
- Revenue mix: Q3 print advertising fell 14% and circulation fell 14%; digital-only subscription revenue rose 16%. Digital advertising and marketing services revenue was essentially flat overall. For the nine months, print advertising fell 14%, circulation fell 15%, and digital-only subscription revenue rose 17%.
- Segments: Gannett Media revenue fell 10% in Q3; segment Adjusted EBITDA rose 18% to $54.3 million. DMS revenue rose 2%, but segment Adjusted EBITDA fell 13% to $13.6 million. DMS core platform average revenue per user increased 5% in Q3 while average customer count declined 3.2%.
- Cash flow: Nine-month operating cash flow was $73.4 million, versus $33.0 million in 2022; investing cash flow was $54.1 million, versus $19.1 million; financing cash outflow was $112.9 million, versus $58.0 million. Cash, cash equivalents and restricted cash increased $15.2 million to $120.0 million. Capital expenditures were $29.7 million.
- Liquidity and debt: September 30 cash and cash equivalents were $109.2 million. Current assets were $463.6 million and current liabilities $561.2 million. Debt carrying value totaled $1.063 billion, including $353.1 million of term loans, $293.7 million of 2026 Senior Notes, $412.5 million of 2027 convertible notes, and $3.3 million of 2024 Notes. Approximate carrying-value net debt, subtracting cash and cash equivalents, was $953 million. The company reported compliance with debt covenants.
Material changes, outlook and risks
- Cost reductions, lower compensation and operating costs, lower restructuring charges, and gains on asset sales helped improve operating results despite lower revenue. Q3 and nine-month gains on asset sales were $23.3 million and $40.9 million, respectively; these are material comparability items rather than recurring operating revenue.
- Gannett repurchased $39.6 million principal of its 2026 Senior Notes during the first nine months at a discount to par and made $78.1 million of term-loan repayments, including scheduled amortization. Debt repurchases generated a reported net gain on early extinguishment of debt.
- Management said it expects adequate resources to meet working-capital needs, debt service and capital expenditures for at least the next 12 months, while warning that a further downturn or faster revenue declines could impair cash flow and liquidity. It expects approximately $10 million of capital expenditures for the remainder of 2023. No specific revenue or earnings guidance was provided.
- Management described persistent print declines, economic uncertainty and weaker advertiser spending, consumer price sensitivity, foreign-exchange exposure, and inflation and interest-rate risks. A 150-basis-point rate increase was estimated to increase interest expense by about $1.4 million for Q3 and $4.1 million for the nine-month period.
- The Q3 income-tax provision was $16.1 million despite pretax income of $13.6 million, reflecting the estimated annual tax rate, valuation allowances on interest-expense carryforwards, and other tax items. The filing reports $61.5 million of unrecognized tax benefits; potential changes from audits and interpretations could not be estimated.
- Gannett is pursuing an antitrust and deceptive-practices lawsuit against Google and Alphabet concerning online advertising markets. It treats any recovery as a gain contingency and cannot predict the outcome or impact. Management did not believe current legal proceedings were reasonably likely to have a material adverse effect, while acknowledging litigation outcomes are uncertain.
- Newly highlighted risks include banking-system volatility and access to deposits, and the potential effects of AI on content monetization, competition, employment, privacy, intellectual property, reputation and legal exposure. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether digital subscription growth and DMS revenue can offset ongoing print advertising and circulation declines.
- Whether reported operating improvement and cash generation persist without large gains from asset sales and other excluded Adjusted EBITDA items.
- Debt repayment capacity, refinancing and maturity risks, variable-rate exposure, and continued compliance with cash and other covenants.
- The drivers and possible future effects of the unusually high Q3 effective tax provision and the unrecognized tax benefits.
- Actual proceeds, timing and continuing lease costs from property disposals and sale-leasebacks, as well as any developments in the Google litigation.