Good morning, ladies and gentlemen, and welcome to the First Quarter 2018 Gannett Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host for today, Stacy Cunningham, Vice President, Financial Planning and Investor Relations. You may begin.

Thank you. Good morning, everyone, and welcome to Gannett's First Quarter 2018 Earnings Conference Call. As a reminder, this call is being recorded. 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 posted to our Investor Relations website at investors.gannett.com. This conference call is being webcast, and is also available through the Investor Relations website. With these formalities out of the way, I'd now like to turn the call over to Bob Dickey.

Thanks, Stacy. We are pleased to report Q1 results that show a continued improvement in the trend of our same-store revenues, driven by stronger digital advertising revenues and the benefit of our full access subscriber pricing initiative. Total company digital advertising revenues increased 5.4% in the quarter, and grew to approximately 44% of total advertising revenues, up from only 38% a year ago. We saw especially robust growth in digital marketing services revenue, as we experienced ongoing benefit from our integration with ReachLocal. The ReachLocal technology platform continues to deliver superior results for our local market client, and our sales training efforts are starting to pay dividends. Our national sales team also delivered a strong quarter, which combined with digital audience growth, resulted in solid digital media advertising revenues. The improved revenue performance, combined with cost management, contributed to less margin compression than expected. Now I'd like to update you on the key initiatives within our marketing solutions and consumer organizations. Starting with our marketing solutions organization. The team had a very busy first quarter executing on its planned transformation, while also staying laser-focused on achieving its revenue goals and delivering solid first quarter results. The local sales transformation is on track, and we now completed the leadership changes in our local markets, which will deliver an annualized run rate of $10 million in savings. As a reminder, the rationale behind our transformation is both to reorganize our local sales efforts into segments more closely aligned with our clients, as well as to streamline our reporting structures. We also were able to centralize our presales client solutions organization in the quarter, resulting in an additional $2 million of annualized savings. As we look ahead to the second quarter, we are focused on the migration of accounts to the new structure…

Thank you, Bob. As mentioned, the first quarter was very busy for the USA TODAY NETWORK marketing solutions organization, as we realigned our new sales and presales structures with streamlined and accountable leadership. The ReachLocal team, many in new broader company roles, spent significant time across all areas in Gannett's business, while still delivering solid results at ReachLocal. Specifically turning to ReachLocal segment results, quarter 1 revenues grew 24% year-over-year to $96.5 million, driven by the addition of the Gannett local market, SweetIQ and solid organic growth. Results were particularly strong in North America with revenues up 31% year-on-year. Our international business, which includes countries in Europe, Asia Pacific and Latin America grew 6% year-over-year. Digging deeper, we had strong growth across our range of solutions. In North America, digital advertising solutions such as search, display, social and retargeting grew 26% year-on-year with continued solid performance from social ads. Our subscription services, such as website development, SEO, listings and review management grew 84% year-on-year, aided by the addition of SweetIQ, an impressive growth from our SEO solution. Looking at our key metrics in North America, year-over-year, our client count increased 14%. Average revenue per client grew 13% and product units per client grew 10%. We believe our focus on the larger end of the SMB spectrum, as well as a broad product offering, continues to contribute to our success. SweetIQ locations grew 54% year-on-year, reaching 67,000 at quarter-end, as we added several large new clients. Quarter one was also strong on the product front, with the launch of our new video solution on both Facebook and YouTube. We're seeing an increase in demand for video in both our national and local markets, in line with industry trends, as marketers turn to video as a key digital marketing tactic. In quarter 2, we will launch the next generation of our reporting for multi-location clients, a key client segment that we're targeting. These larger regional multi-location clients typically require custom reporting, so we have developed flexible reporting tools to quickly meet their needs. Additionally, in the second quarter, we'll launch version 1 of our new sales tool. This proprietary tool will leverage data insights with predictive intelligence to more precisely estimate optimal budget size for our clients. We're excited about this market differentiator that will help us drive strong results for our clients, while also setting right client expectations. Ultimately, we believe this new tool will achieve both greater sales growth productivity in the field, as well as better client retention. Overall, I'm very proud of what both the ReachLocal team and the broader marketing solutions group accomplished this quarter, and we look forward to executing on our strategy to accelerate digital growth even further. With that, let me turn the call over to Ali.

Thank you, Sharon, and good morning, everyone. We are pleased with our first quarter results, which demonstrated improved same-store revenue trends, especially within digital advertising, as well as continued strong cost management. As a reminder, given our move to a Gregorian calendar, our first quarter 2018 results contained 90 days versus 91 days in the first quarter of 2017. Additionally, the day we lost was a Sunday, which is our largest revenue producing day of the week. We estimate the Sunday loss represented approximately $14 million in revenue and $10 million in EBITDA. Consolidated revenues were $723 million compared to $773 million in the first quarter of 2017. The revenue decline reflects the challenged print advertising and single copy circulation environment and the loss of a Sunday, partially offset by our digital advertising revenue growth, our full access subscriber pricing initiatives, the SweetIQ acquisition and some small publishing acquisitions. On a same-store day adjusted basis, total revenues declined 7.2% in the first quarter, an improvement compared to the 8.8% decline in the fourth quarter of 2017. Total digital revenues of $256 million grew 9% in the quarter and represented 35% of total revenue, up from 30% a year ago. Adjusted EBITDA totaled $55 million for the quarter, down from $70 million a year ago. About 2/3 of the decline reflects the loss of the Sunday, and the remaining decline was a result of print revenue pressures. Total same-store day adjusted basis operating expenses fell approximately 7% year-over-year, reflecting lower newsprint expense, production and distribution savings due to facility consolidations and lower payroll expenses. These reductions were offset in part by higher expenses at our ReachLocal segment due to cost of goods associated with higher revenues and some investment related to in-house product development. In the publishing segment, I want to…

[Operator Instructions]. Our first question comes from John Janedis of Jefferies.

You touched on this, but I was hoping for a little bit more color on the digital marketing services strength. I know you mentioned the realignment of the sales organization earlier in the year, and I was wondering to what extent the new structure's already showing benefits or if that's really on the calm. And I guess sticking with ReachLocal, when you talked about cross-selling and increased revenue per client, is there a way to maybe size the opportunity for increased revenue per client? And what are the trends you're seeing on the retention front?

Thanks very much for your question, John. So a couple of things. Firstly, when you look at the total product range that ReachLocal now had, it really spans across search, display, social, a number of new subscription services that are being built out such as websites and SEO. So we see significant opportunity to increase the revenue per customer through a process of cross-selling and up-selling those customers, and that's why we're very focused on that metric of number of products per customers. So that is, indeed, an opportunity that you've identified. When you look at the really great performance that we're seeing from the Gannett market, it is to do with the confidence that the Gannett sales force has in the ReachLocal platform on the back of seeing very tangible, improved performance for their clients as they migrated them from their previous partner to the ReachLocal platform. I don't believe that is driven, as of yet, a form of sales transformation. And I think as we get through the transformation into the second half of the year and we have more focused attention on key client segments, in conjunction with stronger digital training of the sales force, I think that will give us the opportunity to even accelerate further the growth rates in digital marketing services.

Maybe anything on the retention front?

And on the retention front, yes. So ReachLocal has always excelled at client retention of the data that Google, for example, shares with us in our QBR, where they track our retention against our peer set, shows us in the top 10% quartile. What we saw when we transformed the Gannett clients -- when we transferred the Gannett clients from their prior platform to the ReachLocal platform, we saw an uptick in retention rates there, but I still see an opportunity to improve Gannett client retention rates to get closer to the ReachLocal retention rates, and that's something we'll be working on as we consolidate our post-sales organization in the second half of this year. We also see continued opportunities to improve digital penetration rates in the Gannett print-only clients, where whilst we're seeing great growth, our penetration rates are still relatively low.

Our next question comes from Michael Kupinski of Noble Capital Markets.

Cost of sales was materially lower-than-expected, and it was about 250 basis points improvement as a percent of total revenues from the year earlier quarter. I kind of want to go back to your comments about your -- comment about newsprint and so forth. It was -- what is newsprint as a percent of total cost at this point, and what type of rate increases are you anticipating in the second quarter? And in terms of the improvement in the cost of sales, I guess I would assume that we are not likely to see that type of improvement in the first quarter going into the future quarters, given the newsprint price increases, is that right?

Yes, so Michael, it's Ali. Newsprint's about 5% roughly of our total cost base. And so in the first quarter, it was down about 16%. We had -- partially driven by volume, offset by -- somewhat by price increases. So the price increases we're seeing has fully cycled through in the first quarter due to the way we cost it, and also the timing of the price increases. So that is going to start to cycle up against us in the second half of the year. So I think you're also -- you're going to see the timing of that start to impact us later in the year than we saw in the first half of the year, correct.

Got you. And it seems like ReachLocal is kind of hitting its stride in the quarter. Can you talk about that piece of advertising revenues for ReachLocal heading into the second quarter?

So our expectation is that we'll continue to see strong growth in the core ReachLocal business. As we start to think about digital marketing solutions though, we are increasingly really understanding the business in its totality. That's ReachLocal source clients, as well as penetration of Gannett clients. And increasingly, as we deploy more ReachLocal resources against the Gannett client bases, because there's such a large opportunity to drive penetration, we're going to start to look at that business as a whole. And with that as a backdrop, we will continue to see strong double-digit growth for digital marketing services.

Got you. And it seems like there are a number of companies in the industry that have repositioned their balance sheet like you have possibly to take advantage of acquisition opportunities. Can you talk a little bit about where there are opportunities out there, things that are on the market? What areas are you seeing opportunities, digital versus traditional? Any color?

Michael, it's Bob. We've been pretty consistent in pointing out that we're very interested in how we can continue to enhance the ReachLocal offerings, so we're looking very strongly in the digital space around ad products and ad tech. We've done a very thorough examination of the marketplace, and we believe there are a number of very good opportunities out there that we continue to explore. We've also, with Grateful Ventures, are starting to see that there may be some interesting opportunities around content, and we're still very, very optimistic that Grateful will continue to be a good investment for us and has really opened the door for us to give it some consideration around other niche content providers that are out on the marketplaces. Valuations become more realistic. So that's really the primary focus at this point in time.

Our next question comes from Kyle Evans of Stephens.

Digital ad, 35% of total in the period from 30% the year before. Where do you see that contribution going over the longer term?

Sorry, Kyle, just want to make sure I clarify. That's total digital revenue as a percentage of total revenue, so that does include digital circulation. So digital advertising, as a percentage of total advertising revenue, was about 44%. And so look, we've been consistent in saying that -- as for advertising, we're -- we think we'll cross the 50-50 mark somewhere in 2019 for advertising. I think for total revenue to get to that 50-50 mark, it'll be later, a couple of years later than that. So obviously, we're very focused on that trajectory, but we're very focused on the 50-50 advertising threshold in 2019. And as we've talked about many times before, we're well past that at USA TODAY. We're really approaching that 70% threshold on advertising.

Got you. And you're three quarters away done with pricing increases on subscriptions. You knew I was going to ask the question, I always do. Net volume, pricing were in line with your expectations, what specifically were the volume trends...

So Kyle, we added that because we knew you'd ask that question, but...

I know I'm a broken record on that, sorry.

But Maribel can give you some more insights.

Kyle, thanks for that question. As Ali said, we are seeing our volume in line with expectations. Our yield increased approximately in the 20% range. The volume declines did tick up into the mid-teens, but that again was expected. We're estimating about 4% to 5% of volumes declines are tied to pricing. But it's important, I think, that we -- to note that we're focused on our total audience reach across both print and digital. So while the print volumes are a piece of that reach, so is our growing digital audience. And with an overall growing and increasingly engaged audience, we don't see a direct correlation to advertising revenue and print volumes that was more evident in prior years.

Do you say only 4 to 5 points tied to pricing? What data -- or how do you get there?

Because, Kyle, we only priced a portion of our total population. We're able to look at the portion that we didn't price and the portion that we priced, and we're able to kind of come up with an estimate based on the secular decline that's related to the portion of the population we didn't price and sort of extrapolate what we think is related to pricing and what's not.

Got you. One more pricing question, and I promise I'll be quiet about it. What was the average cost increase that you pushed through?

The yield is 20%, but the price increase average was about 35%, Maribel?

Yes.

About 35%, Kyle.

Okay. Can you give us the SweetIQ contribution for the quarter?

No, we're not breaking SweetIQ out separately, Kyle. But it's meeting our expectations and shared in the team. It's rolled into the ReachLocal segment, and we're pleased with the direction that it's taking.

Got you. Can you share with us who the auto win was with?

No. I don't have their permission to release their names. Otherwise, I...

I don't want anybody to get in trouble. Can you give us kind of your updated thoughts on where you stand with the Cars.com relationship?

Yes, I mean, look, we've got a great relationship with Cars.com. I mean we are working hard to continue to be a good performer for them. We value the relationship with them. We've reorganized and Sharon can talk more around this, our whole approach to market around the automotive segment, which we think will drive improved performance there, and continue to work towards executing in that segment. And I don't know Sharon, if you want to add any color to that.

Yes. So we've stood up a dedicated auto vertical. It's a large segment for us across the board, not just with Cars.com. We also believe we can grow a large digital marketing services business in that segment too. So we have a dedicated focus in our sales organization. And over this quarter, we're actually standing up a dedicated client success management group that is going to be focused on both broader auto, but specifically, on Cars.com, and we actually believe that will really help drive up retention rates in our business there. So look, it's a big segment. It's a big market. We're very, very focused on it, and excited about the opportunities.

Our next question comes from Barry Lucas of Gabelli & Company.

Sharon, I think on past calls, you've indicated that double-digit margin would be reasonable for Reach, and the margin progress in 1Q is quite nice to see. Given the success and the number of the initiatives that you described are yet I think to contribute meaningfully, how long do you think it takes to reach that margin goal? You think we could be really in spitting distance by the end of the year? And if you had to pick a long-term margin target, what do you think that might be?

Okay. So I think the first thing to say is, right now, we're very focused on balancing between margin and growth. We see a tremendous market opportunity. The product range is really performing. We still have very low penetration rates of the Gannett base. And so we really are prioritizing growth. And you're seeing that come through the numbers. We're very, very top line growth. Our expectation, as you'll see, improved EBITDA performance quarter-over-quarter, as we go through 2018 and getting very close to that double-digit number. And our sense is, as we go into 2019, we'll be able to continue with double-digit growth numbers on the top line and low-teens, double-digit EBITDA performance.

Bob, maybe you could drill down just a bit deeper on the kind of the local advertising, whether display or pre-print, given the strength in the housing market, in particular, and other ad media that has seen strength in home furnishings and things related to that, home improvement. What's driving the -- I don't want to say it's incremental weakness, but it is still so soft. And maybe you could contrast that with the digital performance in those kind of same categories.

So you look across the board on the national print, ROP side, and you can see the same categories that we've seen in the past, telecommunication, banking, et cetera. Some automotive continues to be weighted down on the national level. At the local -- also, well, this impacts local as well as national. But on the preprint side, department stores are continuing to be a real challenge. Grocery continues to have some challenges with the more traditional grocers trying to figure out how to compete with the Walmarts and the Amazons that try to figure out Whole Foods. And so preprints continue to be in those 2 categories, a big win on us. Locally, we continue to still see, to your point, looking at markets like Phoenix, where the real estates are starting to come back, our home furnishings, our outdoor, anything -- outdoor patio furniture, gardening, nurseries, those types of clients continue to spend very nicely with us. But we're up against some pretty good headwinds when it comes to the preprint and the national print. Sharon can add a little more color, but we are seeing some progress with the frequency print program that we've put out in the local markets. We have about, I think we're right around 50% of our clients that converted, and Sharon can give you a little bit of color, but the performance we're seeing from those clients is much, much better than the previous trends.

Yes, no, you're spot on, Bob. We've seen a really good progress with the frequency print plan on track in terms of where our expectations were. Unfortunately, the offset to that is -- as Bob identified, the preprint area has been such a drag and the very small clients have also been a drag. So that result is in a net position. One of the things we're very focused on with our sales transformation is making sure that at the low end of the business, where we see these high churn clients, by standing up a dedicated sales units focused on these smaller SMBs, that we really start to move the trajectory on those smaller clients, and also the digital penetration there, which is today, very, very small. At the other end of the spectrum, we're standing up a regional multi-location organization that will be operational by early Q3, and that will have a vertical focus, and some of the segments its focused on in the early days are grocery, furniture, education, health, home services, all segments that we see tremendous opportunity by having a more strategic dialogue with these organizations that often span many states, but also a big opportunity for our digital growth added back to them. So our sales transformation is very much geared at addressing those challenging areas and turning them into opportunities for us.

[Operator Instructions]. Our next question comes from Doug Arthur of Huber Research.

A couple of questions. Ali, in the segment table 2, you've got $14.2 million of intersegment eliminations. Is that mostly ReachLocal's sell-through to the newspapers? What is that number?

Yes, this is Stacy. Yes, that's the ReachLocal revenue that's in the publishing segment. Or put another way, that's the local sales DMS revenue, the ReachLocal revenue in the publishing segment.

Okay. And then number two, Sharon, great numbers with ReachLocal. You do face tougher growth comps in the second half. Is it fair to conclude that the growth rate against the tougher comps will slow down a little bit in the second half?

Our expectation is we'll see good growth in the second half, certainly, high double digits. Clearly, the comps do change, because by the time we get to the third quarter, we've already -- we migrated the Gannett client base. But our penetration rates of the Gannett local client is still relatively low. So we still see a lot of opportunity ahead of us.

Okay. And then finally, Bob, I mean, you talked about USA TODAY print pressure, but digital success. Is there any way to sort of put a box around the USA TODAY overall effort within the Gannett complex right now? I mean, it seems kind of amorphous the way -- it's kind of hard to put a box around it right now, and you've got a lot of different things -- going for us at ransom here. I'm just trying to get the overall impact.

We don't look at it that way, and that's why once we've gone to the USA TODAY NETWORK concept, it's very integrated with our local operations both on the digital and print sales side of our organization, as well as on the content that we generate. So we cherished the USA TODAY brand, but it's not managed to the individual entity like it was prior to the Gannett spin. So I can tell you that sales that are specific to USA TODAY, to Ali's point earlier, digital revenues are around 70% of our total advertising, the audience of that, USA TODAY brings as part of the network is a very, very significant contribution, which adds to digital growth for us in many areas, but we don't break it out. Its contribution continues to be meaningful to us. The overall economics of USA TODAY, if it were a standalone, have improved. That's just not how we look at it.

Bob, if I could add to that, our national sales organization is having tremendous success. And we would put that down to the fact that what's really resonating with brands is on national to local footprint, and the audiences that we can bring to them across the USA TODAY NETWORK.

Okay. And just one follow-up on that. I mean, you did start selling a lot of USA TODAY branded content or putting throughput through the -- a lot of the local newspapers. Has that continued? Has that been a success?

We're early stages of rolling out branded content to the local markets, but the early signs are very, very promising, actually. The sales team, very excited about the opportunity, and I think we'll see that starting to impact in the second half of the year.

Overall, it continues to grow. We're very happy. We continue to put resources against it. But to Sharon's point, with the new ad products that we put across the entire network, it opens the doors, particularly in our larger top 25 markets to do local branded content, and we've already seen some results. It's just early.

And ladies and gentlemen, this does conclude our question-and-answer session. Thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.