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Edited Transcript of GCI earnings conference call or presentation 25-Apr-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Gannett Co Inc Earnings Call

MC LEAN Apr 29, 2017 (Thomson StreetEvents) -- Edited Transcript of Gannett Co Inc earnings conference call or presentation Tuesday, April 25, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alison K. Engel

Gannett Co., Inc. - CFO, SVP and Treasurer

* John M. Zidich

Gannett Co., Inc. - President of US Domestic Publishing

* Michael P. Dickerson

Gannett Co., Inc. - VP of IR

* Robert J. Dickey

Gannett Co., Inc. - CEO, President and Director

* Sharon T. Rowlands

ReachLocal, Inc. - CEO

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Conference Call Participants

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* Barry Lewis Lucas

G. Research, LLC - Senior Analyst

* Douglas Middleton Arthur

Huber Research Partners, LLC - MD and Research Analyst

* Parris Jerome Taylor

JP Morgan Chase & Co, Research Division - Analyst

* Thomas Allen Moll

Stephens Inc., Research Division - Research Associate

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Presentation

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Operator [1]

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Good morning. My name is Liz, and I will be your conference facilitator. I would like to welcome everyone to Gannett's First Quarter 2017 Earnings Conference Call. This conference call is being recorded at the request of Gannett. Should you have any objections, you may disconnect at this time. (Operator Instructions)

I will now turn the call over to your host, Mr. Michael Dickerson, Vice President of Investor Relations for Gannett. You may begin your conference.

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Michael P. Dickerson, Gannett Co., Inc. - VP of IR [2]

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Thank you, Liz, and good morning, everyone. I'm Mike Dickerson, Vice President of Investor Relations and Real Estate at Gannett. Welcome to Gannett's conference call to discuss our first quarter 2017 financial results. Joining me this morning are Bob Dickey, our President and Chief Executive Officer; Ali Engel, our Chief Financial Officer; John Zidich, President of Domestic Publishing; Sharon Rowlands, Chief Executive Officer of ReachLocal; and Barbara Wall, our Chief Legal Officer. Many of you have already seen a copy of our press release from this morning. For those of you who have not, it is available on our website at gannett.com.

I would like to call your attention to our safe harbor provision for forward-looking statements that can be found at the end of our 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. Our 2016 annual report on Form 10-K and other periodic filings on file with the SEC provide further detail about the risk factors related to our business.

During this conference call, we may refer to adjusted EBITDA, adjusted earnings per share and free cash flow. We define adjusted EBITDA as earnings before income taxes; equity income; other nonoperating items, which include interest income and interest expense, among other items; severance-related charges; asset impairment charges; acquisition-related expenses; transformation item; depreciation and amortization. We define adjusted earnings per share as EPS before tax-effected severance-related charges, asset impairment charges, acquisition-related expenses and transformation items. The tax impact on these non-GAAP tax-deductible adjustments is based on estimated statutory tax rate for the United Kingdom of 20% and United States of 38.7%. We define free cash flow from operating activities less capital expenditures. These non-GAAP company-defined measures are provided, because management believes they are useful in analyzing the company's operating performance and cash flow before the impact of various reorganization and other charges. Reconciliations of adjusted EBITDA to GAAP net income, adjusted EPS to GAAP EPS, and free cash flow to cash flow from operating activities are included in our press release.

The format for today's call will be as follows: First, Bob Dickey will lead us off with a brief discussion and key update of our key strategic priorities; Sharon Rowlands will then discuss current events at ReachLocal; Ali Engel will then take us through the financial performance for the first quarter and our outlook for the full year of 2017. Lastly, there will be a question-and-answer period.

With that, I will now turn the call over to Bob.

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Robert J. Dickey, Gannett Co., Inc. - CEO, President and Director [3]

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Thanks, Mike, and good morning, everyone. We are pleased to report both revenues and adjusted EBITDA for the first quarter are ahead of consensus estimates. Overall, revenue trends were somewhat lower than the fourth quarter, consistent with the expectations set when we provided our full year 2017 outlook in March. That is that revenue and earnings comparisons to the prior year would be more challenged in the beginning of the year and improve in the second half of the year. As such, we've maintained our revenue guidance for the full year and improved our adjusted EBITDA outlook, which Ali will go into in more detail in a bit.

At Gannett, we are thrilled that the USA TODAY NETWORK was recently recognized as a Pulitzer finalist in the Investigative Reporting category for our Dishonor Roll series, led by Steve Reilly, Nick Penzenstadler and John Kelly. Dishonor Roll chronicled the failure of the nationwide school system to identify abusive teachers and prevent them from being hired by neighboring states. This honor was received in the first full year [ of integration ] of the USA TODAY NETWORK. It's the first time USA TODAY has been recognized as a Pulitzer finalist in the Investigative Reporting category, and represents the first network-wide investigative effort that ran across all of our properties, on all of our platforms. It is exactly this type of investigative reporting and relevant journalism that makes a difference in the local communities we serve every day.

Let me mention a few specific digital metrics that are helping convince advertisers to put their digital advertising dollars with the USA TODAY NETWORK, which includes not just USA TODAY, but our 109 local markets in the USA. During the first quarter, 2 of the fastest-growing components of digital, and that being local U.S. market mobile and video, were up a combined [ 73% ] compared to the first quarter of 2016. In March, we experienced a 45% increase in video views in our local markets and achieved a record 25.8 million YouTube video plays. Also in March, we published approximately 150 videos a day, an increase of 25% over the fourth quarter.

We were pleased to see first quarter year-over-year same-store revenue growth up 3.7% for U.S. local market digital advertising revenue. This is second quarter in a row of growth. While this growth is not offsetting print declines, it marks an important turn in trend for our local markets where digital growth will be critical to the transformational success of the business. This trend appears to be continuing as we enter the second quarter. Also, national digital advertising, which was very strong throughout 2016, was flattish on a same-store basis in the first quarter, but happy to report it's back to double-digit growth as we move through the second quarter. In March, the company averaged more than 115 million unique digital visitors, an increase of about 5% sequentially from the fourth quarter of 2016. Our goal remains to be the #1 source for news and information.

(inaudible) the USA TODAY NETWORKs again ranked #1 in the News and Information category as measured by comScore, with nearly 80 million unique digital visitors. Digital-only subscriptions, excluding acquisitions, were up 73% from the first quarter of '16 and 10% sequentially from the end of 2016. Overall, we ended the first quarter with approximately 250,000 digital-only subscribers.

Finally, Newsquest in the U.K. continues to make good progress transitioning its business to digital. Digital advertising revenues in the first quarter of 2017 were 26% of total advertising compared to 22% in the first quarter of 2016. Digital display revenues, that is without classifieds, were up 18% year-over-year, and their daily unique visitors were up 5% year-over-year. These strong digital performances are clear examples of the strength of the network model, and we've only just begun to realize these benefits.

With that, let me turn the call over to Sharon, who will discuss recent events at ReachLocal.

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Sharon T. Rowlands, ReachLocal, Inc. - CEO [4]

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Thank you, Bob. We're pleased with our first quarter performance at ReachLocal with operating revenues of $77.6 million and adjusted EBITDA of $3.1 million. We experienced continued momentum in the North American markets and strong growth in our Latin American markets. Also during the quarter, we accelerated the timetable for our launch into Gannett local markets and acquired SweetIQ. In North America, we experienced a first quarter growth rate faster than the fourth quarter of '16; a growth in the number of clients and continued uptick in the penetration of new products. The number of product units from our clients adopting the ReachLocal Facebook solution doubled sequentially in the first quarter compared to the fourth quarter of 2016. And our lead management software grew 39% year-over-year and 10% sequentially from the fourth quarter of '16.

Our national brands channel grew 13% compared to the prior year first quarter, while increasing the number of client locations served by 11% over the same time period. The SweetIQ acquisition will continue to enhance our future product offering to this very important client segment. In North America, we kicked off the migration of Gannett's digital marketing clients from the G/O Digital platform to ReachLocal. We also commenced the roll-out of ReachLocal products into the local markets in the U.K. This migration is ahead of schedule and anticipated to be largely in place by the end of the second quarter, bringing several efficiencies and increased profitability in the second half of the year. During the first quarter, we ramped up spending for headcount and infrastructure to support this migration, unfavorably impacting profitability in the short term, but we will realize greater growth and profitability in the second half of the year.

In Latin America, we recently partnered with a major newspaper in Brazil. With this partner, ReachLocal will be the provider of digital services to their advertisers. This partnership has brought with it about 2,000 new clients. They have lower average revenue per unit than the historical ReachLocal business, providing a great platform for upsell and growth. Latin America is still a relatively small portion of our overall business, but revenue grew sequentially 30% over the fourth quarter of 2016.

Finally, we were very excited to announce the acquisition of SweetIQ last week, further accelerating our innovation in providing the best digital marketing solutions to help local businesses achieve their goals. SweetIQ today powers over 250 brands and marketing agencies, covering over 50,000 brick-and-mortar locations across the United States and Canada. These include premium brands like, IKEA, A&W, Lumber Liquidators and WellStar Health Systems, who use the SweetIQ platform to manage their online listings on major partners like Google, Yelp and Facebook.

In today's digital landscape, location management is a critical best practice for any brick-and-mortar business that wants to reach local customers online. In addition, the ability to monitor and manage online reviews at scale can help businesses enhance their reputation and set themselves apart from the competition. We see numerous synergies with SweetIQ, including transitioning from our current provider to a more robust in-house solution, selling SweetIQ into ReachLocal and Gannett national multilocation clients, and cross-selling ReachLocal into SweetIQ clients. This acquisition not only enhances our solutions in this market segment, but also brings with it great technology along with a tremendously talented team that will enhance our business as a whole. As we head into the second quarter, our focus continues to be scaling up the migration of Gannett clients onto the ReachLocal platform, integrating SweetIQ, and aggressive focus on growth in the national and multilocation segment.

With that, I'd like to turn the call back over to Ali to discuss the financial results.

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Alison K. Engel, Gannett Co., Inc. - CFO, SVP and Treasurer [5]

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Thank you, Sharon, and good morning, everyone. Operating revenues for the first quarter were $773.5 million compared to $659.4 million in the prior year first quarter, an increase of $114.1 million or 17.3%. Excluding $11.4 million of unfavorable foreign currency exchange rate changes and $1.8 million of selected exited operations, revenues increased $127.2 million or 19.3%. The increase in revenue was primarily attributable to acquisitions, partially offset by ongoing declines in print advertising and circulation demand.

Consolidated adjusted EBITDA for the quarter was $69.7 million compared to $80.4 million in the prior year first quarter. Adjusted EBITDA in the first quarter was unfavorably impacted by $3 million of foreign exchange rate changes as well as declines in print advertising revenues, partially offset by growth in local digital advertising, the impact of contributions from acquired businesses and ongoing operating efficiencies. In the publishing segment, operating revenues were $694.9 million, an increase of $36.9 million or 5.6% compared to the prior year first quarter. Excluding, again, $11.4 million of unfavorable foreign currency exchange rate changes and $1.8 million of selected exited operations, revenues increased $50.1 million or 7.6%. This increase primarily reflects contributions from acquisitions and a 3.7% increase in digital advertising performance in local U.S. markets, partially offset by a 17.7% reduction in print advertising. On a same-store basis, publishing segment operating revenues were down 10.7%.

Publishing segment digital advertising revenues of $94.6 million were up 8.3% compared to the prior year first quarter, due primarily to acquisitions, improved local performance in the U.S., including strong mobile growth. Excluding acquisitions and the impact of a 26.6% reduction in the employment category, digital advertising revenues increased 2.3%. The increase was driven by a 39.2% increase in mobile display and a 14.3% increase in other sources of digital advertising revenues, such as digital marketing services.

Adjusted EBITDA for the quarter was $91.7 million compared to $97.5 million in the prior year first quarter, a decrease of $5.8 million, including $3 million in unfavorable foreign currency exchange rate changes. Pressure from declines in print advertising and circulation revenues in the U.S. and the U.K. were largely offset by contributions from acquired businesses, ongoing cost reductions and efficiency gains in operating expenses and increases in local digital advertising revenues, particularly mobile display.

In the ReachLocal segment, operating revenues for the first quarter were $77.6 million and adjusted EBITDA was $3.1 million. ReachLocal continues to perform in line with our expectations, showing continued growth in the number of clients, penetration of subscription products and sales of its recently launched Facebook solution. As described in Gannett's press release dated April 20, 2017, the company acquired SweetIQ, which will be operated as part of ReachLocal's portfolio of products. In SweetIQ's first full year of operations, we expect this acquisition to be modestly dilutive to earnings per share and neutral to earnings per share by the second full year.

Net cash flow from operating activities for the quarter was approximately $31.1 million compared to $17.3 million in the first quarter of 2016. Capital expenditures were approximately $15 million, primarily for technology investments and real estate projects. During the first quarter, the company paid dividends of $18.2 million. The company did not repurchase any of its outstanding common stock during the first quarter.

At the end of the first quarter of 2017, the company had a cash balance of $89.5 million and a balance on its revolving line of credit of $385 million or net debt of $295.5 million.

The company maintains its original revenue guidance for 2017 of $3.15 billion to $3.22 billion. Revised adjusted EBITDA guidance for the full year 2017 is increased to $355 million to $365 million, an increase of $30 million from the midpoint of the company's original adjusted EBITDA guidance of $330 million. The $30 million increase is made up of the following components: $19 million for the full year impact of the pension accounting change, $8 million of [ third ] quarter operating over-performance relative to expectations, $5 million for improved operating results for the balance of 2017 and a negative -- offset by a negative $2 million of adjusted EBITDA dilution from the acquisition of SweetIQ for the remainder of 2017.

I would now like to turn the call back to the operator, who will assist us in taking some questions. Liz?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Alexia Quadrani with JPMorgan.

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Parris Jerome Taylor, JP Morgan Chase & Co, Research Division - Analyst [2]

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This is Parris Taylor on for Alexia Quadrani. I just had a quick question in terms of corporate margins at ReachLocal. How do we think about the trajectory back to its historic margins? I mean, could normalization occur in 2018, once Gannett laps a full year of integration into its local markets? How do we think about that?

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Robert J. Dickey, Gannett Co., Inc. - CEO, President and Director [3]

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We expect -- this is Bob. We expect to see ReachLocal continue to improve its margin throughout '17 and into '18. We will -- as Sharon pointed out, as we start to integrate into the Gannett local markets, that'll have a positive impact as well as broadening the product portfolio with SweetIQ. Sharon, would you like to add anything else?

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Sharon T. Rowlands, ReachLocal, Inc. - CEO [4]

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Yes. Thanks, Bob. Look, essentially, this is really about scaling and as we get the total business back to growth and take advantage of the Gannett footprint and thereby scale revenues, we really expect to get to that sort of like 10% EBITDA margin range fairly quickly.

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Operator [5]

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Our next question comes from Doug Arthur from Huber Research.

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Douglas Middleton Arthur, Huber Research Partners, LLC - MD and Research Analyst [6]

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Sharon, on ReachLocal, is it fair to say, looking at what you reported a year ago, that your revenues were essentially flat in the year-over-year on a pro forma basis, which would be a significant improvement in trend? I know you eliminated a lot of products.

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Sharon T. Rowlands, ReachLocal, Inc. - CEO [7]

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Yes, and scaled back a number of the international markets. If you remember, that was a core part of getting back to sort of profitability. But yes, you are correct. We actually did see growth in the North American business, offset by a little bit of weakness in the European business, but we are definitely seeing an improved trajectory.

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Douglas Middleton Arthur, Huber Research Partners, LLC - MD and Research Analyst [8]

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So I mean, is it fair to say, you would -- as your comps get easy -- easier, you would hope to see some actual top line growth in the second half or you're not ready to go there yet?

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Sharon T. Rowlands, ReachLocal, Inc. - CEO [9]

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I think, given what we're seeing in terms of our ability to leverage Gannett and the trends in -- particularly in the North American business and our national multilocation business, I would feel hopeful that we will see growth as we work through the year.

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Douglas Middleton Arthur, Huber Research Partners, LLC - MD and Research Analyst [10]

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Okay, great. And the -- Bob, on the same-store ad revenue growth for the newspapers, can you just kind of clarify. You made some comments about Q1 trends versus Q4 and sort of what you're expecting to see in Q2. I just was a little unclear on trends. It looks like it was down about 13% same-store in Q1, is that about right?

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Robert J. Dickey, Gannett Co., Inc. - CEO, President and Director [11]

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We're looking at -- right now, we're looking at Q2 to perform more in line with what we reported in Q4. The beginning of the year was a little soft for us and we've been building throughout the first quarter, and we're happy with what we're seeing in the second quarter. Some of that is we're seeing in the print business that was softer than expected in the first quarter; some of which was the Easter shift, but as you know, a number of major retailers had a difficult holiday season and were slow at the start of the year. Anything else you want to add, John?

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John M. Zidich, Gannett Co., Inc. - President of US Domestic Publishing [12]

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I think, we're also moving into the heart of our event business, which (inaudible) about 25% of our market in the second quarter are trends on revenues there are above last year, so we're performing at a good clip there. We also think that -- or are seeing in our national digital business again. So I think between preprint, events and improvement in our national business, we'll report, as Bob said, more in line with what we saw at the end of last year.

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Sharon T. Rowlands, ReachLocal, Inc. - CEO [13]

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And yes, Doug, the 13% was the correct number.

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Robert J. Dickey, Gannett Co., Inc. - CEO, President and Director [14]

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Yes.

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Douglas Middleton Arthur, Huber Research Partners, LLC - MD and Research Analyst [15]

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Okay. Then finally, Ali, could you just go over those -- I kind of lost you there, you made a number of -- in terms of your updated EBITDA guidance, you went through the pension adjustment. Can you just go through those 4 items again?

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Alison K. Engel, Gannett Co., Inc. - CFO, SVP and Treasurer [16]

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Absolutely. Pension is $19 million and that's an accounting change, where we're moving pension expense, that's the full year number. It was about $4.7 million for the first quarter, moving that from within EBITDA to below the line. $8 million of first quarter operating over-performance relative to expectations. $5 million for improved operating results for then the balance of the year, so Q2 through Q4. So $13 million total in improved operating performance. And then offset by $2 million of negative EBITDA for SweetIQ acquisition.

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Douglas Middleton Arthur, Huber Research Partners, LLC - MD and Research Analyst [17]

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And did you have -- I know there was a lot of foreign currency adjustment to your pension liability. Is there any update on that number in Q1?

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Alison K. Engel, Gannett Co., Inc. - CFO, SVP and Treasurer [18]

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This was very small change, I think, $17 million change for the quarter.

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Sharon T. Rowlands, ReachLocal, Inc. - CEO [19]

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Yes.

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Alison K. Engel, Gannett Co., Inc. - CFO, SVP and Treasurer [20]

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I don't have the -- I looked at it this morning, Doug, and I think it was -- went down by about $17 million, less than $20 million.

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Sharon T. Rowlands, ReachLocal, Inc. - CEO [21]

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Yes.

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Alison K. Engel, Gannett Co., Inc. - CFO, SVP and Treasurer [22]

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Yes. It went down to about $722 million.

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Operator [23]

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Our next question comes from Kyle Evans with Stephens.

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Thomas Allen Moll, Stephens Inc., Research Division - Research Associate [24]

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This is Tommy in for Kyle. I wanted to start on your same-paper circ down about 8% year-on-year for the quarter. Could you give us a breakdown in terms of subscriber count versus price increase there? And then also, what kind of circ assumptions are baked into the guide for the full year, please.

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Alison K. Engel, Gannett Co., Inc. - CFO, SVP and Treasurer [25]

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Yes. So first of all, I just want to remind everyone that in the fourth quarter, we had a re-class adjustment. So Q4 would have been down 4 6 versus this quarter of 8%. In Q4, we had some premium pricing related around the holidays, particularly Thanksgiving, and so that is something that we're not cycling through in Q1. What we're doing is, this year we're looking at testing several new pricing approaches that we would think will be more effective, and those tests -- that testing resulted in us pushing things -- pricing initiatives we thought we would start earlier in the year to later in the year, but we think there will be more effective and that those results will be much more beneficial, but they won't start -- won't see some of those benefits until later in the second quarter, but most of those benefits coming in the last half of the year. Our home delivery volumes are very similar to the fourth quarter, down in the 10% range year-over-year. The trend change is pretty much all rate-driven, which was closer to flat year-over-year in the quarter. So a lot going on in circulation, because we're working very hard on this program with respect to pricing and hope to have some, at least, good news about what to expect in the second half of the year and hopefully seeing some results later in the first -- second quarter to talk to you guys about next time.

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Thomas Allen Moll, Stephens Inc., Research Division - Research Associate [26]

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Great, thank you, that's helpful. And then my second and final question, if I could. Would you please give us an update on what the M&A landscape looks like, both for print and digital?

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Alison K. Engel, Gannett Co., Inc. - CFO, SVP and Treasurer [27]

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Yes. I mean, I'll give a start and let Bob chime in. We continue to have a robust pipeline of M&A activity. The team is very busy working on exploring lots of alternatives. I think one of the things we talked about multiple times since the ReachLocal acquisition is doing what we would like -- what we kind of term as tuck-in acquisitions for ReachLocal to help them grow their product suite and provide more opportunities to upsell their customers outside of just traditional search and round out their product portfolio in ways that they can do faster than developing products. SweetIQ is a perfect fit into that tuck-in type acquisition. And so we've done now one of those. We continue to look at a lot of other opportunities in that realm. We continue to look at other more transformative digital acquisitions, like ReachLocal, but don't have anything, I think, that is currently close in that nature. We look at opportunistic local market acquisitions and always try to see what is out there for us and -- but I don't believe we have many of those in the pipeline right now, as there's just not a lot going on in that space. Bob, do you want to add anything to that?

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Robert J. Dickey, Gannett Co., Inc. - CEO, President and Director [28]

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I think you covered it. Most of our focus right now will be more in the digital space that Ali is pointing out to continue to push the ReachLocal integration into our company.

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Operator [29]

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

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Barry Lewis Lucas, G. Research, LLC - Senior Analyst [30]

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Just out of curiosity, what allowed you to get into the Gannett markets with ReachLocal earlier and what would the time table look like to, if you plan to be in all 100-odd local markets, what would be the time table to be up and running?

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Robert J. Dickey, Gannett Co., Inc. - CEO, President and Director [31]

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I'll let John give you the background, but we were able to -- after the acquisition of Journal Media Group, we were able to move ReachLocal into those markets. And once our agreement with G/O Digital expires in June, we'll be moving into the rest of the Gannett markets. Anticipate 100-plus markets being up by the end of the year, but I'll let John give you a little more color.

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John M. Zidich, Gannett Co., Inc. - President of US Domestic Publishing [32]

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I think that the key to moving early was just a really good relationship with G/O, being able to wind down that piece of the business within our operation, while us winding it up was crucial for both of us. So we came to a really good plan working with Sharon's team to work through a conversion process that was both productive for our organization and minimize the impact on theirs.

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Barry Lewis Lucas, G. Research, LLC - Senior Analyst [33]

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Great, John. And Ali, if you could, if I look at sort of the trend in pounds Sterling kind of leveling off in the third quarter, is it fair to say that the FX impact will be roughly comparable, maybe $3 million again in the second quarter and perhaps a little bit less in the third?

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Alison K. Engel, Gannett Co., Inc. - CFO, SVP and Treasurer [34]

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If you -- that's what you believe about those trends, then that would be true, Barry. If I had my crystal ball -- look, we're hoping for stabilization, and I think that would be productive for us. But it is what it is in terms of our ability to predict that. But yes, if those assumptions were to hold true, that ought to be correct.

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Robert J. Dickey, Gannett Co., Inc. - CEO, President and Director [35]

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The range.

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Alison K. Engel, Gannett Co., Inc. - CFO, SVP and Treasurer [36]

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Yes, the range is correct.

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Operator [37]

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I'm showing no further questions in queue at this time. I'd like to turn the call back to Mr. Dickerson for any closing remarks.

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Michael P. Dickerson, Gannett Co., Inc. - VP of IR [38]

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Thank you all very much for joining us today. That concludes our call. If you should have any further questions, you can reach me throughout the day at (703) 854-6185. Thanks, and have a good day.

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Operator [39]

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Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone, have a great day.