Lee Enterprises, Incorporated Price & Performance (LEE)

Good morning. Thank you for joining us. In addition to myself, speaking on this morning's call are Kevin Mowbray, President and Chief Executive Officer Tim Millage, Vice President Chief Financial Officer and Treasurer and Lee Autolene, Chief Transformation and Commercial Officer. Earlier today, we issued a news release with preliminary results for our first fiscal quarter of twenty twenty five. Is available at lee.net as well as major financial websites. Please also refer to our earnings presentation found at investors.lee.net which includes supplemental information. As a reminder, this morning's discussion will include forward looking statements based on our current expectations. These statements are subject to certain risks trends uncertainties that could cause actual results to differ materially Such factors are described in this morning's news release and in our SEC filings. During the call, we refer to certain non GAAP financial measures. Reconciliations to the relevant GAAP measures are included in the tables accompanying the release. And now to open the discussion, is our President and Chief Executive Officer, [indiscernible] Thanks, Jared, and good morning, everyone. Our team has made great progress driving our digital transformation forward. While continuing to serve our communities with trusted high quality local journalism In our last call, we shared how Lee has been leveraging artificial intelligence enhance our digital transformation strategy I'm excited to again have Lesa Lee, our Chief Transformation Commercial Officer on the call today.

Les will share more in a bit about how Lee is transforming how we engage with our customers, scale our advertising opportunities through the use of AI. Lee is consistently outpacing our industry peers in several important measures of digital growth, both digital subscriptions and digital agency revenue. Digital subscription revenue grew 46% annually over the last three years nearly doubling the nearest industry peer. On the advertising side, AMP by digital agency revenue has significantly outpaced Dardier's peer growing 33% annually Lee over the past three years.

Total digital revenue was $3.00 $2,000,000 on a trailing twelve month basis, including $102,000,000 with an AMP by digital agency. Our first quarter digital revenue grew 5% year over year with each stream of digital revenue showing growth Digital subscription revenue continued to lead our strong growth growing 14% year over year.

Our digital revenue is diverse and growing and our first quarter results puts us in a position to take advantage of the AI partnerships Lee recently made And I'd like to pass the call over to Les. Thanks, Kevin. Building on the momentum from our last earnings call, we've made significant advances in AI driven personalization for our readers and AI business technology for our advertisers.

For our readers and subscribers, developed next generation AI personalization system powered by AI search and AI answer engine technology, through our partnerships with Perflexity and AWS. This system enhances how users interact with our content and ensuring that these trusted journalism is more relevant engaging and accessible than ever before. As part of this, a hyper personalized consumer news experience. Powered by AI, and Lee's extensive news network. Currently, we are testing across our major news markets with expanded testing throughout the quarter. There's more to come in the next couple of quarters and early test results are promising with adoption rates already at 85% among engaged users. Demonstrating a strong demand for AI enhanced news. Experience. On the advertising side, we've launched smart sites, an AI powered website platform that transforms business pages into dynamic, search and answer hubs This technology provides businesses with a competitive advantage increasing user engagement and time spent on their site by a factor of five to one. Compared to traditional specialized content websites, In addition, we're excited to announce the AI enablement program or AI boost and new AI powered advertising and automation solution that generates high quality content for our The AI Boost program will begin creating automated text based advertising and marketing content.

Ensuring businesses maximize their visibility across the emerging AI search channels and traditional global web search. As we progress into 2025, this product will expand and will include automated podcast and video content creation, providing advertisers with a full suite of AI driven content solutions to enhance their brand presence. Complementing this launch we will introduce small and medium business AI advanced and resource center, which will include new AI powered marketing tools and advertising automation solutions. To help businesses scale their digital presence more effectively There's more details to come and that will be shared in the next quarter. At Lee Enterprises, we remain committed to leveraging AI to create value for our readers advertisers and shareholders. Driving both engagement and revenue, and growth more income for the next quarter as we continue our AI driven expansion.

Next, I'll pass the call over to Tim.

Thank you, Les.

Digital revenue has grown more than 17% annually since FY 2021.

And that has translated to 13% annual growth in digital gross margins. Our digital margin is also an impressive 70% meaning our digital businesses are highly profitable. Replacing upfront revenue with growing and profitable digital will help us achieve long term sustainability and we see that on the horizon in the next year or two. Speaking to the quarter's results, total operating revenue in the first quarter was $145,000,000 Total digital revenue continued to show growth over the prior year up 5% led by 14% revenue growth in both digital subscription revenue and amplified digital revenue.

As Les mentioned, it is still early days with our AI partnerships However, we expect them to accelerate digital revenue growth in the last three quarters of FY twenty twenty five achieving our outlook of 7% to 10% growth year over year. Moving over to the cost side, Lee has a successful track record of effective cost management We remain focused on operational excellence and driving margin in our legacy print business However, our main priority to drive long term sustainable digital revenue growth. Investments in AI will drive new revenue and maintain our dominant position in the local market As we've proven year after year, we expect our investments to be more than offset by cost saving efforts on the legacy side of our business Continuing that track record, we have identified $40,000,000 in annual cost reduction that will be executed by the end of the second quarter. On the over to the balance sheet, our credit agreement with Berkshire Hathaway includes favorable terms including a twenty year runway a fixed interest rate and no financial performance covenant. These better than market terms allow us to stay laser focused on executing our strategy.

We also continue to identify opportunities to monetize our non core assets which improves liquidity and facilitates accelerated debt repayment. In the first quarter, we closed over $5,000,000 of asset sales and another $1,000,000 deal has already been closed since December. We have identified an additional $25,000,000 of non core assets and the monetization of these assets will provide a significant source of liquidity in 2025, As a reminder, Lee's three pillar growth strategy is poised to achieve total digital revenue of more than $450,000,000 by 2028. As Kevin mentioned earlier, our first quarter results showed $3.00 $2,000,000 of annualized digital revenue. Demonstrating we are well on our way to achieving our total digital revenue target. Achieving our long term outlook will come from continued growth in digital subscription revenue, Amplify Digital Agency revenue growth, and new AI revenue opportunities. Looking at the full year, I'd like to remind everyone of our 2025 outlook for total digital revenue, and adjusted EBITDA. We expect total digital revenue growth in the range of seven to 10% and we expect adjusted EBITDA to grow in the low single digit And with that, will turn the call back to Kevin for closing comments. I'd like to reiterate my gratitude to the entire lead team for the progress we've made on our digital transformation.

We're paving the way for lead to lead the industry in this era of AI digital transformation. This concludes our remarks. Tim will remain on the line for any questions you may have. Operator, please open the line Thank you. At this time, we'll be conducting a question and answer session. As a reminder, if you are assessing this call by webcast, you may submit questions on your screen. Our first caller comes from the line of Daniel Hermet of Sun City and Company. Your line is now open.

Thank you. Hey, good morning, guys. Thank you for taking my questions. Just a couple ones and I'll start with one for Les. Lee, a lot going on with the AI and I understand that you may not be able to share everything right now, but you just talk about kind of the plans to monetize your AI library and any potential launches we could be looking for in your second fiscal quarter And then just any the value proposition that you may be providing to your advertising [indiscernible] would be more for Tim and Kevin, and that's just you could provide a little bit more information on the cost initiatives that you've identified for 2025. As well as your confidence in hitting the the range of digital revenue growth that you provided along with EBITDA understanding that the most recent quarter was a little bit challenging. But any information on that? And then as well, I didn't see it in the Lee. And if I missed it, I'm sorry. But just how many digital subscribers did you end the quarter with? [indiscernible] With regards to our library of content We're evaluating what is the highest return obviously that we can get for our corpus of information, we use and everything that is a core asset of the business.

So we're taking all the right steps to analyze what is the best yield that we can possibly get. And one more correct partners that will continue that opportunity into the future We think there's a lot of yield in our content Obviously, we want to get the most out of it. But right now, the closest proximity to revenue and operating [indiscernible] That's where our advertisers gain the benefit of the relationships we've already established with Perplexity, ProRata and being able to list their content in those search and answer so that they can establish their next best position in the digital marketplace.

And as Global Search now transitions to Lee search and answer engines powered by AI We're the first company getting there to provide that capability.

So we feel very strong about the AI Boost program. And I think just in general, as we see lots of other changes moving in what is called the white space, applications, of AI, not just the large language models. We're really well positioned better than anybody in the industry to take advantage of that, more proven that already with the test of our personalized new service.

I can jump into your question regarding our confidence in our outlook for FY 2025.

You mentioned the cost side, I think that's one aspect.

That gives us confidence. I'd say overall, there's three things that I would point to that give us confidence in achieving our full year guidance. Number one, continuing to gain Gail, from our core digital businesses that's the Amplify, that's in our digital only subscription revenue, Both of those revenue streams grew 14% year over year in the first quarter, our fastest growing revenue categories. They make up 36% of our revenue in the quarter and continue On the unit side, you asked about units, digital subscription units were up 8% and totaled 774,000 The second area item that gives us confidence in achieving our full year guidance is what Les just talked about. Is accelerating our growth due to the AI initiatives. [indiscernible] Other programs we think that has the opportunity to accelerate digital revenue growth in quarters to more than three and four as well.

That can help accelerate revenue trends. And then the last point is on the cost side.

We've identified $40,000,000 of cost annualized costs that we're evaluating and we expect to execute over the the end of the second quarter.

A number of things including optimizing our print business and driving efficiencies.

Additional technologies like agentic.ai and others. So gives you a little flavor as to how we're thinking about FY 2025 and why we have the confidence in achieving our goals.

Of luck in the coming quarter.

Great. Thank you, Daniel. We have no questions on the webs. Will turn it back to Kevin for closing remarks. Well, thank you all for joining us this morning. We remain keenly focused on transforming our business for the long term benefit of our shareholders, our employees, our readers and our advertisers.

We appreciate your time this morning. And your interest in the Thank you. At this time, we have reached the end of our question and answer session. This concludes our call.

Goodbye.