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.

Thanks, Stacy. I'm going to start by giving you highlights from the quarter from our marketing solutions and consumer organizations. Then I will turn it over to Sharon for an update on ReachLocal, and Ali will conclude with our detailed financial results. Overall, our third quarter results reflect steady progress on our digital transformation with strong results from our ReachLocal segment, including the WordStream acquisition. During the quarter, we also encountered weakness within our Publishing segment. I will provide more color on that in a moment. However, we expect these trends to continue in the fourth quarter, and are therefore lowering our full-year revenue and adjusted EBITDA guidance. Despite these challenges, we remain focused on delivering growth in our digital business, driving further cost efficiencies and capitalizing on the digital opportunity. Turning to our ReachLocal segment, we reported solid revenue growth and achieved margins that exceeded our expectations, driven by strong growth in average revenue per client. Additionally, this quarter was the first quarter that included WordStream, provider of Software-as-a-Service local digital marketing solutions that we acquired in July. We are pleased WordStream delivered quarterly revenues and adjusted EBITDA that exceeded our expectations due to higher client spending. We truly believe that we have the strongest digital marketing solution set in the marketplace and remain optimistic about our market position and future growth opportunities. Within our Publishing segment, we experienced challenges in the digital media category, reflecting three main factors: our local sales reorganization; weakness within local digital display; and the cycling of some unprofitable affiliate partnerships we ceased in Q4 of last year. First, in reference to our sales structure, at the end of the second quarter we shifted accounts based on the new organizational structure and made reductions in our post-sales organization. While these changes affected sales productivity and fulfillment in the near-term, we strongly believe they were the right changes to make and will be beneficial long-term. We are now turning our attention to recruiting and developing the tools and training needed to continue our transition to a higher performing digital sales organization. For example, in September, we launched a new go-to-market product solution brand, LOCALiQ, to better package our broad set of marketing solutions to enable a more consultative sale. Second, we saw weaker revenue trends within local digital display, reflecting downward pressure on CPMs, a shift from display to more performance-based marketing like our digital marketing service products, and lower page views reflecting our decision to tighten our paywalls to more aggressively grow our local pay digital-only subscriber base. Specifically, on the paywalls, we closed side-door via social and search; lowered meters across our small- and mid-sized markets; and tested premium content around high school sports, across one-third of our market. While these changes resulted in the loss of programmatic digital display advertising, we saw greater than expected local pay digital subscriber growth, which will more than offset the advertising shortfalls over time. And finally, as I mentioned during the fourth quarter last year, we implemented some unprofitable - we eliminated some unprofitable affiliate partners, which had a strong third quarter in 2017. Excluding the eliminated affiliate revenues, our Publishing segment digital media revenues would have grown 3.1%. On a positive note, within the Publishing segment, our national digital media business had another very strong quarter, with double-digit revenue growth, driven by direct premium sales and continued strength in programmatic. Additionally, we saw improved digital advertising and marketing services revenues at Newsquest, as their launch of ReachLocal products and services in the U.K. is quickly gaining momentum. As we look ahead to the fourth quarter, we expect similar trends within Publishing segment, digital advertising and marketing services revenues, with weakness in local digital media, offset in part by continued growth in national digital media. Shifting to the consumer organization, while our audience growth was more muted in the quarter, we did outperform our peer group. Our comScore unique visitors grew 2% year-over-year to $122 million this quarter, compared to a flat peer group. The more muted growth reflects a strong news cycle a year ago that is impacting all news publishers, as well as our focus on local pay digital-only subscriber growth, that I previously mentioned. We continue to see very strong results in the key growth areas like video. Total network video views were up 23% year-over-year with even more robust revenue growth. Our kind brands: 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.

Thank you, Bob. The ReachLocal segment delivered another strong quartet with solid revenue growth, record adjusted EBITDA margin and the launch of LOCALiQ, our data-driven marketing solutions brand that represents our integrated B2B marketing solutions product suite. Given our expanding solution capabilities with the addition of WordStream, we will begin discussing ReachLocal segment revenues within two broad categories: digital advertising and subscription solution. Additionally, with the divestiture of Europe and Japan, international now represents a smaller piece of our business. And we will therefore focus our comment on our North American operation. Digital advertising, which represents about 75% of North American revenue, includes products such as search engine advertising, social advertising and display advertising. Subscription solutions, which makes up the remaining 25% of revenue, represents two revenue streams. Firstly, software, which includes our new WordStream business as well as existing lead management and field service software products; and secondly, presence solution, which includes listing and reputation management from SweetIQ, SEO services, website development and other services that have subscription pricing. In quarter three, we experienced strong growth across both revenue categories. Digital advertising revenues grew 5% year-over-year and subscription solutions revenues grew over 100% year-over-year, driven by the WordStream acquisition and a 15% increase in presence solution. Our North American client base grew to 16,100 in the quarter, up 18% year-on-year driven by the addition of WordStream. Excluding WordStream our client counts were down slightly, as we continue to churn smaller client and focus on acquiring larger higher ARPU client. These larger clients are more profitable and tend to have a higher retention rate. Excluding WordStream, our average revenue per client grew 11% year-over-year and total just over $2,000 in the quarter. This quarter also marked a significant milestone in our transformation of the business with the launch of our new data driven marketing solution, LOCALiQ. LOCALiQ is our complete suite a performance-driven marketing products, including search engine marketing, display retargeting, location and reputation management and website development. This new brand creates a central, simplified story about how we can help local visitors succeed and drive improved return on investment for their marketing dollars. Key to the LOCALiQ launch is our sales organization with the full release of upgraded tool, which we mentioned last quarter. LOCALiQ is a proprietary digital auditing technology to provide guidance, context and recommendation around a business' online marketing presence, including specific budgets with a defined set of outcomes that can be expected by the client; the greater combined smart insights and data intelligence to empower a business, by comparing its digital presence to that of its competitors. The technology provides recommendations of marketing approaches without costly trial and error leading to a much better and faster return on investment. The launch of LOCALiQ helps us differentiate ourselves within the market. We're driving awareness of being more than our media company by elevating our digital marketing solutions within the core Gannett client base, which has traditionally had product penetration, primarily across our owned and operated offerings. The launch has also served as a unifying initiative across our B2B organization; from marketing to sales, to client success, to product with focusing our internal teams across our various sales channels with a central message of vision for the marketing solutions business. With the launch of LOCALiQ, we rebranded our client facing tools and reporting interfaces. We also made several improvements to our reporting, making it easier for our clients to see their ROI, when working with LOCALiQ. We will be continuing to focus in quarter four with the launch of a new customizable reporting dashboard that will easily scale and provides even better insights to our clients. In addition to the progress of LOCALiQ, our product development teams were busy in the quarter. They were working on improvements to our website solution, developing new targeted display solution and continuing our reporting and contact API integration that enabled multi-location account, agencies and other clients to receive contacts and reports that tie into their own system. We now have more than 1,000 accounts using our API. We also have a new social advertising solution hit the market. Our new social ads with smart optimization that allows the client to select one of three goals: 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.