GCI - Gannett: Why I Would Wait To Take A Position

Summary

• While the company is showing some improvement, I believe its share price is getting ahead of itself.
• Revenue in Q4 2022 was down 10.3 percent from a decline in print and digital advertising revenue.
• Adjusted EBITDA was down 21.7 percent in Q4, while adjusted EBITDA margin fell to 12.4 percent.
• Guidance for 2023, which was underwhelming in my opinion, takes into account a soft landing or no recession at all. Any surprises on that front would hit the stock hard.

Since trading at approximately $19.00 per share on July 16, 2018, the share price has collapsed to under $0.70 per share on April 20, 2020, rebounded to about $7.00 per share on September 27, 2021, and has since pulled back to hit a recent 52-week low of $1.25 on October 17, 2022, and has since more than doubled to around $2.85 per share on March 1, 2023.

Gannett Co., Inc. ( GCI ) had mixed results in its earnings report for the fourth quarter of 2022, with revenue, adjusted EBITDA, and adjusted EBITDA margin all down. One bright spot was GAAP EPS of $0.17, which beat estimates by $0.02.

Even though the company guided for improvement in EBITDA, free cash flow, and first lien net leverage below 2x by the end of 2023, there are still a significant number of headwinds it faces, and that is going to be evident in the next earnings report, which will face tough comps.

In this article we'll look at some of the numbers from its recent earnings report, the specific challenges the company faces, and why I believe it's better to wait to get a lower entry point.

Some of the numbers

Revenue in the fourth quarter of 2022 was $730.7 million, down 11.6 percent year-over-year, and down 10.3 percent on a same-store basis. Revenue for full year 2022 was $2.61 billion, compared to revenue of $2.89 billion for full year 2021. The decline in revenue was attributed primarily to a drop in print and digital advertising revenue, and to a smaller degree FX headwinds of $9.4 million, or 114 basis points.

Revenue for full year 2023 is guided to be from $2.75 billion to $2.8 billion, reflecting a drop of 3 percent to 5 percent year-over-year. Management said it expects revenue in the first half of 2023 to be similar to 2022, with the second half slowing down to a low single-digit drop on a same-store basis. With the first quarter of 2023 expected to be a weak one based on comps, it suggests the second quarter should be by far the best of 2023.

Overall digital revenue in the fourth quarter of 2022 was $269.2 million, down 0.4 percent year-over-year, but up by 190 basis points sequentially. That of course was to be expected with holiday/Christmas spending. The decline in digital revenues came from a drop in digital advertising revenue, pointing to a soft market. The drop in digital ad revenue has continued on into 2023, according to management.

Adjusted EBITDA in the reporting period was $90.4 million, down 21.7 percent from the fourth quarter of 2021. Inflation was cited as a major reason for the decline, with an estimated $25.00 million impact on fourth quarter adjusted EBITDA compared to the fourth quarter of 2021. On a full year basis, the company estimates it had an impact of approximately $100.00 million. In regard to current inflation, management said it believes the worst is behind the company. Based upon seasonally revenue strength in the fourth quarter and cutting costs associated with headcount and non-payroll expenses, the company saw adjusted EBITDA sequential growth of $38.4 million, and guides for it to increase in a range of $280.00 million to $300.00 million, or 10 percent to 15 percent in 2023.

At the end of the fourth quarter of 2022 the company had cash and cash equivalents of $94.3 million, compared to cash and cash equivalents of $130.8 million at the end of calendar 2021. Total debt as of the end of the reporting period was $1.3 billion, with first lien net leverage of 2.68x for full year 2022.

The near and long-term future

On the print side of GCI's business, the company believes it retains some pricing power in regard to new subscribers. In order to attract and retain new subscribers, the company introduced an all-in-one pricing model, which has proven to increase subscriber retention.

The goal is to work on solidifying its print subscriber base and boost the lifetime value of its print customers.

A couple of areas of concern in its print advertising business was the decline in revenue from classified categories like employment and obituaries. To address that softness the company added a self-service order mechanism that has so far shown a lot of promise, with order volume and order size improving.

While its print business may provide a foundation for the company to build on, the growth vehicle for the company in the future will continue to be digital marketing solutions and digital-only circulation. Revenue from digital-only circulation climbed by 29.5 percent to $35.5 million on a year-over-year basis. ARPU was up a modest 2 percent during the same period of time.

Management believes it has the elements in place to lower churn and increase retention from its focus on data and insights, improving the company's interaction with customers, and maximizing its subscriber funnel.

I agree that if it's able to execute on its strategy, it'll be able to attract more valuable long-term customers and decrease the need to offer low-priced introductory offers that cut into margin.

Concerning its Digital Marketing Solutions business, revenue jumped to a record $121.1 million, up 7.8 percent year-over-year. Adjusted EBITDA in the unit came in at $16.4 million in the fourth quarter of 2022, reflecting a margin of 13.5 percent. Improvement in this segment was attributed to the effect of its national clients on the business and its "focused product portfolio." Expectations are this should continue which will result in wider margins and an increase in ARPU.

The number of customers in the segment dropped sequentially, primarily from the impact of smaller customers in multi-locations that are still part of this business. It appears the company is moving away from that and focusing more on larger customers in order to improve the consistency in the unit.

The bottom line is, even though digital is the future, it will have to continue to improve upon existing products and services in this segment, while it develops new products and features that will result in a more even performance throughout any given year.

Conclusion

Although GCI appears to be heading in the right direction, it's not out of the woods yet, and must continue to execute on its business strategy in order to grow revenue and improve the bottom line.

It's easy to see what it's attempting to do with its print business, but whether or not it'll be able to grow print on a incremental basis while it makes up for slow growth in that segment with its digital businesses, remains to be seen. As management stated, the first quarter of 2023 is will struggle to achieve the level of revenue generated in the first quarter of 2022, making it a tough comp to compete with. I see that as a key headwind in the short-term and is one of the reasons I think it's best to wait before taking any significant position in GCI stock, especially after the recent boost in its share price. I think much of that is already priced in, making the stock prime for a correction. It will probably happen before the next earnings report, but if it doesn't, barring a surprise, it'll happen after the earnings report, assuming the company isn't able to come close to matching last year's revenue numbers.

I think there's a strong possibility of more downside for the company, but once another correction comes, I think that would be the time to take a position and simply hold for the long term, understanding it's still going to take time for its digital business to be a meaningful tailwind for the company.

For further details see: