Dallasnews Corp (DALN) 2024 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to the DallasNews Fourth Quarter and Full Year 2024 Earnings Conference Call. (Operator Instructions)

And I would now like to turn the conference over to Gary Cobleigh, Vice President and Controller of Dallas News Corporation. Gary, you may begin.

Good morning, everyone. This is Gary Cobleigh, Vice President and Controller of Dallas News Corporation. Welcome to our fourth quarter and full year 2024 investor call.

I'm joined by Cathy Collins, DallasNews' Chief Financial Officer, who will be reviewing financial results; Katy Murray, President of DallasNews; and Grant Moise, Chief Executive Officer, who will provide brief business remarks.

Yesterday afternoon, we issued a press release announcing fourth quarter and full year 2024 results and filed our 2024 10-K. Both of these are posted on our website, dallasnewscorporation.com under the Investor Relations section. Unless otherwise specified, comparisons used on today's call measure fourth quarter and full year 2024 performance against fourth quarter and full year 2023 performance.

Our discussion today will include forward-looking statements. Forward-looking statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from those statements. The company assumes no obligation to update the information in this communication, except as otherwise required by law. Additional information about these factors is detailed in the company's press releases and publicly available filings with the SEC.

Today's discussion will include non-GAAP financial measures. We believe that non-GAAP financial measures provide useful supplemental information to assist investors in determining performance comparisons to our peers. A reconciliation of GAAP to non-GAAP financial measures is included with our press release.

I'll now turn the call over to Cathy.

Good morning, everyone, and thank you for joining today's call. On a GAAP basis for the quarter, DallasNews Corporation reported net income of $4 million or $0.74 per share, and an operating loss of $1.8 million. In Q4 last year, we reported a net loss of $2.2 million and an operating loss of $2.5 million, which includes severance expense of $2.7 million for the 2023 voluntary severance offer.

On a non-GAAP basis for the quarter, we reported an adjusted operating loss of $1.3 million, a decrease of $1.9 million when compared to adjusted operating income of $600,000 reported for the same period last year. We reported $31.1 million of total revenue for the quarter, which compares to $34 million last year.

Advertising and marketing services revenue decreased $1.3 million for the quarter due to a print advertising revenue decline of $1.1 million or 16.6% compared to the same period last year. Circulation revenue decreased $800,000 for the quarter, primarily due to a $700,000 decline in print circulation revenue, which included $200,000 from single-copy sales for the fourth quarter of 2023 for the Texas Rangers winning the 2023 World Series.

Other revenue decreased $800,000 or 19.4% for the quarter, resulting primarily from a canceled commercial printing partnership, and non-recurring revenue of $500,000 generated in 2023 from Texas Rangers World Series product sales. On a non-GAAP basis, total adjusted operating expense for the quarter was $32.4 million, an improvement of $1 million when compared to the same period last year driven by expense savings of $600,000 in employee compensation and benefits and $500,000 in newsprint.

Turning to full year results. On a GAAP basis, we reported net income of $131,000 or $0.02 per share, and an operating loss of $7.1 million which includes severance expense of $2.8 million related to the transition of our print and distribution operations to a smaller printing facility. Net income includes a non-cash tax benefit of $5 million resulting from a reduction in the valuation allowance in anticipation of the use of net operating losses to offset the 2025 gain on the sale of the Plano property.

For 2023, we reported a GAAP net loss of $7.1 million and an operating loss of $8.1 million. On a non-GAAP basis for the year, we reported an adjusted operating loss of $1.6 million, an improvement of $1.1 million when compared to an adjusted operating loss of $2.7 million reported in 2023. The improvement is primarily due to expense savings of $15.4 million with the greatest reductions in employee compensation and benefits, distribution expense, and newsprint, partially offset by a total revenue decline of $14.3 million. $10.7 million of the revenue decline and $9.1 million of the expense savings are the result of the discontinuation of the shared mail program and print-only addition of our niche publications in 2023.

We reported $125.4 million of total revenue for the year, and this compares to $139.7 million last year. Advertising and marketing services revenue decreased $11.1 million or 18.9% year over year. Excluding the $10.7 million reduction in print advertising resulting from the discontinued product lines, print advertising revenue declined $1.4 million or 5.7%, partially offset by an improvement of $1 million or 6.5% in marketing and media services revenue driven by new customer contracts that began in 2024.

Circulation revenue decreased $500,000 from 2023, which was driven by a print circulation decline and $200,000, which is attributable single-copy sales for the Texas Rangers winning the World Series. The print circulation decline was partially offset by an increase in digital-only circulation revenue. As of December 31, the news had 64,334 digital-only subscribers, an increase of 1,334 or 2.1% compared to last year.

We continue to focus on finding the optimal balance between pricing and volume strategies for digital subscription, and Grant will provide additional commentary on those efforts shortly. Total subscribers, including both home delivery and digital subscribers was 126,973 as of December 31, and compared to 132,694 as of December last year. Other revenue decreased $2.7 million or 17.7% compared to last year primarily due to a canceled commercial printing and distribution partnership of $900,000 in revenue.

On a non-GAAP basis, total adjusted operating expenses for the year was $127 million, an improvement of $15.4 million or 10.8% when compared to the $142.4 million of adjusted operating expense last year. The improvement is primarily due to expense savings of $5.5 million in employee compensation and benefits, $6.5 million in distribution and $3.5 million in newsprint. Newsprint expense is favorable year-over-year as the result of lower circulation and discontinuing print-only additions of our niche publications. The newsprint purchase price has continued to trend favorably. As of year-end, the average newsprint industry cost per metric ton was $637 compared to $687 in 2023, a decrease of 7.3%. We are monitoring for any potential impact as they relate to potential price increases and tariffs in 2025.

As of December 31, headcount was 526, down 75% compared to last year. As of the beginning of May, we expect headcount to be approximately 420 feet after the departure of production employees in the first quarter of this year. Cash alone short-term investments was $9.6 million on December 31. And as of March 17, cash was $47 million. In 2024, we paid $484,000 of Texas franchise tax for fiscal year 2023 net of tax refunds. We expect the Texas franchise tax in May of this year to be approximately the same for 2024.

For the year, the company recorded a tax benefit of $5 million due to a reduction in the valuation allowance for deferred tax assets that we determined to be realizable as an offset to the income from Plano property sales. As of December 31, 2024, the company had $60.1 million of federal net operating loss carryforward. 1.5 million which expire in 2037 and $42.5 million that you now have an expiration.

In the first quarter of 2025, we will record a gain on the sale of the Plano property and utilize a significant portion of our NOLs to offset the gain, which will minimize cash taxes. We're pleased with the progress the company has made this year towards our long-term strategy, and we were right in line to how we expected to end the year. We remain in a good position on our balance sheet made stronger with the recent sale of the property in Plano that Katy will elaborate on, and we're encouraged by the results we are seeing so far in 2025.

I will now turn the call over to Katy.

Good morning, everyone, and thank you for joining our year-end call. I am extremely pleased with the progress we made in 2024 on a number of initiatives. First, we have transitioned our print operations to a smaller, more efficient facility, and in addition to generating over $5 million in annualized expense savings to start in 2025. The move has allowed us to successfully monetize the Plano facility for $43.5 million. We are truly excited that Diego EV will be repurposing the facility.

Second, the sale of the property has provided capital, which will allow us to voluntarily fully fund our pension plan. As Grant and I have always stated, we view the pension plan as our debt and have been committed to ensuring that the retirement benefits of 1,300 of our former and current employees is secure and fully funded.

As of the end of January, the plan was approximately 94% funded and the investment allocation had been moved to 100% immunizing to limit market risk and volatility. We expect that we will contribute between $14 million and $16 million before the end of the second quarter to complete the purchase of an annuity contract from an insurance carrier and complete the transfer of the plan assets.

I will now turn the call over to Grant.

Thanks, Katy. Reflecting on 2024, the year was highlighted by transformational projects focused on the long-term success of the company. As Katy noted, the transition of our print operations to a smaller and more efficient facility and the sale of the Plano property have been instrumental in our ability to strengthen our balance sheet by reducing expenses, adding cash and giving us the ability to eliminate the only debt the company has.

In addition to these print production changes Medium Giant's contribution to the company's operating income was a priority in 2024 and continues to be in 2025. As we reviewed the business at the end of 2023, I needed better visibility into the margin that we knew our agency business could deliver, and this led to the implementation of segment reporting. Segment reporting not only gives the management team and me the visibility we need into the business, but it also provides our investors that same insight.

While Medium Giant has not hit the margin we are seeking on a year-over-year basis, Medium Giant improved its contribution by $1.2 million and is becoming more accretive to the company as John Kiker, President of Medium Giant, continues to implement his strategy.

On the Dallas Morning News side of the business, investments in our website and our app were a priority last year we chose to prioritize these product enhancements over the creation of new digital products in 2024, which was a deviation from our original plan to diversify our digital product portfolio. This change was necessary because our digital audience for our core products had begun to decline after many years of consistent growth.

We need a growing digital audience to continue to fuel our digital subscriptions and digital advertising revenue from our core product, and we have chosen to stabilize that audience before shifting additional resources to expand the portfolio. These product enhancements in 2024 included our website performance. The speed of a website is one of the largest determining factors of its prioritization on search engines.

In December of 2024, the page load speed of dallasnews.com was 5.9 seconds. This improvement is 19% better than the beginning of 2024 and 46% faster than where we were 18 months ago. We also chose to upgrade our core app. We upgraded this app for both iOS and Android, and we've received positive feedback from consumers from those material upgrades in its user experience. We will continue to do the same thing in 2025, so our journalism can shine on all platforms.

We launched an in-article video player in our sports section last year, and we are rolling it out at the video player across the entire website in the coming months. Early results are strong as we're meeting direct advertising goals, and we've increased the time spent on page by 3.2 times than prior to the implementation of the -- of this in article video player.

In addition to video, we also brought back Reader commenting on our website we heard from our customers that not being able to comment on stories made our website experience less valuable than other news websites. Similar to how we launched video, we're starting with a single section of the website, and we'll continue to roll out this functionality in the coming months.

Going from product to digital subscriptions, as Cathy noted, when we think about digital subscriptions, we continue to focus on the right balance between price and volume. In the third quarter of 2024, we made an intentional shift from pricing to strategies that would grow our digital subscription volume. While we're still in the early stages of this new price strategy, we grew our digital subscription base by 3,119 in the fourth quarter which was the strongest volume growth we have seen in eight quarters.

Last but not least, our focus has and always will be on the excellence of our journalism. In 2024, we had an investigative series entitled, Bleeding Out. Our journalists uncovered that tens of thousands of Americans die from preventable bleeding each year because ambulances were not carrying blood.

As a result of this excellent journalism, a new program in Dallas has been implemented that will ensure paramedics have blood supplies in the field, which will help prevent deaths between accident sites in the hospital. For a journalism company focused on excellence, when we see that our work translates into policy changes that improve or in this case, saves lives, it reminds us why journalism is so important to our region and our country.

As we look to 2025, our team remains focused on continuing to produce excellent journalism, improving our digital products, growing digital subscription growing digital subscriptions and maintaining the excellence of our print product from our new plant in Carrollton.

Krista, we will now open it up to questions.

(Operator Instructions) Your first question comes from [Rohan Gilmore].

On the print advertising side, there was a pretty substantial decrease quarter-over-quarter and year-over-year. Can you guys share some color on kind of what led to that decrease and what you saw in the quarter and what you're seeing in the year-to-date for advertising?

Yes. So Rohan, it's Grant. I'll answer that. Print advertising is unique because less than 10% of our print advertisers are on an annual contract. So what that means is that we get it sometimes just in time. It's like just in time inventory. We get these things very -- in very short order. And what happened in the fourth quarter with that 16.6% drop was obviously much lower than the rest of the year. And it came from a variety of areas, but mostly in our classified revenue.

Our classified revenue was just uniquely soft in the quarter. It continued a little bit into the early part of this year, and we're seeing March start to pick up. So again, when it's one of those things that is not contracted, it has some volatility and that's the bad news as we saw. But the good news is that that pendulum can swing in the other direction as well.

On the expense side, can you guys provide the total operating expenses incurred in the quarter that's associated with the 80 or so employees that are going to be leaving the company is related to the Plano severance plan?

So Rohan, I'll take that question. I'm not going to provide the fourth quarter. There was a lot of activity happening then. And I think everybody knows -- we were really pleased that the sale was completed last week. It took a little bit longer than we had expected, but the patience was worthwhile, and we've got the right buyer for the property.

The first quarter on a year-over-year basis, that's really going to be clean is going to be the second quarter of this year, even in this first quarter. We've been incurring facility charges and employees, et cetera, because we've owned the building up through last week. And so I think on the first quarter call, that will be really the first opportunity for us to get some insight into the second quarter where we're going to start seeing, again, year-over-year favorability.

But what I will say is, and I made in my comments, the $5 million on an annualized basis is a good number. Again, that's annualized. So while we had hoped that it was started on January 1, it's not. So it's going to be really kind of starting in the second half of March and the full first month of April. But we'll give visibility to that on our first quarter call. But again, those savings are substantial and are going to be realized.

Got it. And that makes sense. On the digital volume circulation, Grant, could you -- would you be willing to provide that year-to-date?

Yes. I will tell you, I don't have the specific numbers, Rohan, of kind of where we are year-to-date. I'll tell you that 3,000 that over 3,100 where we were in the fourth quarter has slowed down in the first quarter. But some of that may be the market, I mean, I will, for those of you on this call who track the industry, digital subscriptions overall across the industry have softened. However, we also are doing something on February 18, we implemented a new AI algorithm technology for our payroll. And so what that is going to do is measure the propensity of someone to subscribe when they get to the site.

The technology will kind of intercept them based on who has the highest propensity to subscribe. And like any technology, again, that I said we implemented in mid-February, it's just taking a little bit of time to -- for those algorithms to kind of read what's unique to our market. So again, we're going to be softer in the first quarter than we were in the fourth quarter. It is hard to tell at this point, Rohan, how much of that is just because we've done such a significant paywall technology change versus what is caused more by the market. But obviously, we'll have more to come on that at the end of the first quarter.

Adam Ballantyne, Gondolin Capital.

On the asset sale, with the utilization of the NOLs, I was just curious what you might expect the after-tax proceeds to be?

So on an after-tax basis, so the gross proceeds were $43.5 million. We expect that we're probably going to be paying less than about $1 million in taxes between state and federal. And then net of the sales costs, Adam, we're really looking at net proceeds probably close to $39 million.

Oh, great. Okay. And then capital expenditure basis, I think you guys noted $2 million in additional CapEx for the new facility and I think mostly in the first quarter. And then once that's completed, is -- do you kind of go back to the pre 2024 run rate that you guys have of sort of $100,000 to $200,000 a quarter? Or maybe you could help me out on the CapEx intensity going forward after the first quarter?

Yes, Adam, you're exactly right. Look, the first quarter, we had some of the final payments of the press, and we also had some capitalized items as are related to the lease facility. Going forward, our capital requirements are going to be minimal -- really just around laptops and things like that. So I would say each quarter substantially probably in that $250,000 to $500,000 range, but that would be the max at $500,000.

Okay. Great. And then on the -- I know that there was a lot of noise, as you said, in the fourth quarter, but just kind of looking at the consolidated expense lines for the other production, distribution, operating costs that had a pretty major jump in the fourth quarter. And I was wondering if -- I didn't see any fourth quarter non-cash severance in there, just from a margin point of view, so it becomes 52%. Is that going to come down in 2025? Or are we going to see the majority of the $5 million savings comes from the employee comp and side?

Adam, it's a great question. So look, I think in the fourth quarter, we had some additional expenses, obviously, on a year-over-year basis related to the new Carrollton facility lease. That will be consistent in '25. However, we will see reductions along the production and distribution expenses. Again, probably not going to see a lot of those coming through until the second quarter of this year.

However, the $5 million, I would tell you, is going to be majority is going to be sitting in comp and then, which would be the salary cost and then also the benefit cost. And then the remainder of that will be down in the production and distribution and operating expense line. As Cathy mentioned on newsprint and ink right now, we've been seeing favorability on newsprint pricing, but that's an area that we're going to continue to watch this year, especially as the discussions around tariffs increase.

Great. Just one more for me, if I could. In terms of sort of cash flow and profitability tie I don't think are excluding the $2 million CapEx and the gain you'll obviously see from that -- is it too soon to say if the business will be cash flow positive this year, just given kind of cyclicality of advertising spending.

So Adam, what I would say, as you know, we don't give guidance. I'm not going to speculate on the cash flow of the company is everything that we are focused on, right? I mean, obviously, the CapEx will become more minimal throughout the year, but it really will depend on operations. Our goal is to be cash flow positive as soon as we possibly can. But again, I can't speculate on the exact timing of that.

[Booker Smith, Smith Management].

Congrats on sale. Can you comment more on the capital allocation, understand your annuitizing the pension require, I think you said roughly $14 million to $15 million of cash contribution. But after that, how much CapEx exactly will be required for the remainder of the Carrollton facility?

And after that, what do we think the proceeds are going to be used for? Is it going to -- is the delta primarily going to be used for a distribution to shareholders, do you think? Is there other CapEx that needs to be funded? I'd like some color on that.

Great, Booker, thank you for joining our call. So great question. Look, I think as everybody knows, the sale of the real estate was our last significant -- well, actually, our last real estate that we had to sell, and it just closed last week. As I mentioned in my premiered comments, we took the opportunity in January to immunize the investment allocation of the pension in anticipation that we would be able to annuitize that.

And historically, we've talked about three different things that, one, from a capital allocation perspective, the Board really looks at it in three ways. One, what do we need as the investment in the business ongoing. How do we think about our ongoing obligation to the pension -- and then what do we think about from a capital allocation for shareholders? We just answered the second question on the pension. It's going to take really through the second quarter to fully annuitize that.

What I would say, though, as we think about capital allocation, back to your question, CapEx on an annual basis, outside of the Carrollton facility expense or the capital in Q1, annual capital should be somewhere between $0.5 million and $1 million, $1 million on the top end if there needs to be some replacement of something significant.

Right now, the Board is continuing to think about capital allocation. It will continue over the next several months. As everybody knows, we've got Board meetings every quarter, but right now, just really focused on eliminating this pension obligation that we had and really giving the management time to really assess what the capital needs are for the business to continue to invest in our digital applications. As we all know, digital growth is a key part of our return to growth plan.

Okay, thanks. I'll return to that in a second. I got one question in terms of your transaction expenses. So the gross purchase price on the Plano facility, I understand that was $43.5 million, and then there's a $600,000 escrow -- did I hear that right that you're anticipating net proceeds of roughly $39 million?

Yes. And we had basically expenses related to whether that's commissions, legal expenses, environmental work that we had to do. That is the difference.

Got it. So that -- am I right in thinking that's around 10%?

A little less than 10%.

A little bit less than 10%. Got it. Okay.

There will be some taxes as well. So we will have some cash taxes, but less than $1 million.

Okay. So it's $39 million, the right number to think about in terms of net proceeds?

Yes. Yes.

Okay. All right. And actually, last thing, how much is expected for Carrollton for the remainder for -- until it's done?

I'm sorry, were you asking about the capital expenditures?

Yes. The CapEx for Carrollton.

They're going to be completed in Q1 with a couple of million dollars related to the press, and then the finalization of any of the leasehold build-out that we have to do. But they are basically all incurred at this point.

Okay. Great. And actually, I have one more. Your digital margins, are you seeing those accretive to your overall margins? Or are you seeing those like inch up, I guess, to your print margins? How would you describe the digital margins and your digital investments?

Yes, Booker, it's Grant. I'll take that. On the digital margins, I mentioned, video is an example. Video is really a good yield play for us because what advertisers are willing to pay for video advertising is considerably higher than print. And that's why every bit of video we can add to the site, one, it's great for the subscriber, but also, two, it is very good for us to continue to improve the digital margin, which is already very strong on the Dallas Morning News side of the business. But again, that is -- the main financial driver for us behind this focus on video is that it just continues to make the margin better from the core digital asset.

Okay. So your view is that margin will be accretive to the overall -- or I'm sorry, digital will be accretive to the overall margin for Dallas Morning News in total?

Yes.

Okay. That's all I have. Thanks for taking the questions.

And we have no further questions in our queue at this time. I will now turn the conference back over to Cathy Collins for closing remarks.

Thank you, Krista, for your assistance this morning. And to everyone who has joined, thank you again for listening to our fourth quarter and full year 2024 results. And we look forward to updating everyone on our first quarter 2025 results, which will be held in mid-April.

And ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.