Good afternoon, everyone, and welcome to Sidoti's May Microcap Conference. My name is Daniel Harriman, and I'm an analyst here at Sidoti. This afternoon we're going to get to hear from Lee Enterprises, ticker LEE. The company's President and Chief Executive Officer, Kevin Mowbray, will be talking, as well as the company's CFO, Tim Millage. We're going to give them about 20 minutes to go through the presentation, after which time I'm going to open it up for a Q&A for about 10 minutes. If you do have any questions during the presentation, please feel free to type it into the Q&A box. And time permitting, I'll get to as many as we possibly can. But with that, on behalf of Sidoti, Tim, Kevin, thank you so much for being here, and I'll hand it over to you.
Great. Thanks, Dan. Good afternoon, everyone. I'm Tim Millage, Lee's vice president, Chief Financial Officer, and treasurer, and joining me today is Kevin Mowbray, Lee's CEO, and we're excited to share with you the many reasons for our optimism for Lee's digital transformation and Lee's future. Before we dive into our strategy and industry-leading operating results, I wanted to spend a brief moment sharing an overview of Lee. Lee is a digital-first subscription platform providing communities with valuable, intensely local news in 73 U.S. communities. Our products are concentrated in midsized markets where being part of a local community still means something. A few of Lee's major brands and publications are covered here, which include STLtoday, the leading digital product in St. Louis, Buffalo News, Richmond Times-Dispatch, and the Omaha World-Herald.
Lee's digital marketing services brand is Amplified Digital, which competes across all markets in the U.S. but is concentrated in Lee's markets. BLOX Digital is a rapidly growing SaaS company and a CMS market share leader in North America. Our total revenue over the last 12 months is $638 million. Our three-pillar digital growth strategy is transforming Lee into a vibrant, digitally centered company as we're transforming the composition of our revenue, and we are well positioned to drive value for shareholders as we continue to execute our transformation. I'm hopeful that even for those who do not regularly follow Lee, that after the conversation today you take away three main points of who Lee is. First, Lee is a digital-first local content subscription platform in strong midsized communities.
Second, Lee is led by a three-pillar digital growth strategy that leverages our 10 million known users and our more than 25,000 local advertising relationships to drive our digital transformation. Three, the transformation is well underway and has Lee well positioned to drive value for our stakeholders. With those three points in mind, I will kick the call over to Kevin.
Thanks, Tim. I'm Kevin Mowbray, Lee's President and Chief Executive Officer, and I share Tim's excitement with this opportunity to talk about Lee's digital future. One key milestone of our digital transformation is reaching a digital inflection point where more than 50% of our revenue is derived from digital sources. The reason this milestone is important is because it means we're less reliant on the volatility of our print business, and we reach the point where if our digital revenue grows at a similar rate as the decline of our print business, the company's total operating revenue will grow. What's more, given the profitability of our digital revenue, total revenue growth also means cash flow growth. When we first launched our three-pillar digital growth strategy, digital revenue represented just 21% of our total operating revenue.
The significant growth of our digital revenue from our three-pillar digital growth strategy has transformed the composition of Lee's overall revenue in just the past few years. Total digital revenue represents 48% of our revenue today, and we expect to surpass the inflection point next quarter. Our goal is to be growing and sustainable from our digital products only is to lessen the impact of print on our total company operating results. As we continue our transformation, we expect to reach that point by 2028. I'll flip it back to Tim to discuss our investment thesis before I go into more detail on our strategies.
Thanks, Kevin. With a sound strategy that is generating industry-leading results in digital growth and rapidly transforming the composition of our total operating revenue, Lee is well positioned to drive value for our shareholders. As we think about the value proposition of Lee, there are two prongs to our sound investment thesis: a deleveraging story and a transformation story, both poised to generate value. With strong cash flows and our use of cash flow to repay debt, cutting our debt in half generates nearly $40 in share value at static valuations. That's nearly four times what it is today. On top of the deleveraging story, there's a potential for revaluation of Lee as a digital company.
As we continue to execute and generate industry-leading growth, achieving our long-term targets of $450 million of digital revenue, there's a strong case to be made for multiple expansion beyond the depressed values we are seeing today, and that has the potential to create even more value for our shareholders. So I'm hopeful that you can connect the dots from our strategy to our sound investment thesis and see the reason for our optimism and that Lee is well positioned to drive value for, for shareholders. Now I'll turn it back to Kevin.
Lee continues to demonstrate digital leadership. We're the fastest-growing digital subscription platform in local media, and with Amplified, we're the fastest-growing digital marketing solution agency by significant margins. Digital subscriber growth at Lee has outpaced our industry peers for the last 17 quarters. We now have more than 745,000 digital subscribers, which is up 25% compared to the prior year. We've also increased average rates for our digital subscriptions by an exceptionally strong 17% over that same period. Growing digital subscribers while driving higher prices highlights the strong demand, the resilience, and the value of the trusted local content we provide our markets. This industry-leading performance gives us even more confidence in achieving our long-term goals, which we'll revisit later on the call. Amplified Digital achieved 8% revenue growth over the last 12 months despite a soft advertising environment.
Revenue totaled $92 million and has grown an outstanding 35% annually over the last three years, far outpacing others within the industry. Fueled by these industry-leading metrics, total digital revenue has grown to $285 million over the last 12 months, which is driving the rapid change in our revenue composition, as evidenced on the next slide. Lee is rapidly transforming from a print-centric to a digitally centric company. Our focus is on expanding our digital audiences, growing our digital subscription base and revenue, and diversifying and expanding our offerings for local advertisers. The long-term results of our strategies are expected to generate $450 million of recurring, sustainable digital revenue within five years.
With that level of performance, Lee will be sustainable solely through cash flow generation from our digital products, and extremely encouraged by the progress of our strategy thus far and its pace at which we're transforming Lee into a vibrant, digital-centric company. Converting more and more of our vast, addressable market to digital subscribers is a key part of our strategy. We've made tremendous progress growing our digital subscribers, as we have more than 745,000 digital subscribers today. As we learn more about our readers, that information will inform our sophisticated and customized marketing tactics that are aimed at converting readers into subscribers. One of the proof points that gives us confidence in our digital subscription strategy is the significant addressable market, specifically our known user base. Knowing our readers allows us to put the right offer in front of the right user at the right time.
While a significant portion of our addressable market remains anonymous, we now have 10 million known users. Also of importance is we've maintained a solid conversion rate driving the growth of our digital subscribers. Our pillar two strategy is working and is expected to drive our long-term results, which we'll cover on the next slide. Now I'd like to revisit our long-term outlook that we shared last year. This slide provides insight into the long-term trajectory of our digital subscriptions and associated revenue. The acceleration in digital subscription revenue growth over the past three years is driven by investments we've made in top talent in the areas of content, branding, and consumer marketing. These investments are producing strong results from engaging local content, effective branding campaigns, and KPI-driven marketing campaigns, and we expect the results to continue to push us forward.
With these investments in action, we expect to achieve $150 million of recurring digital subscription revenue by fiscal year 2028, fueled by 1.2 million digital subscribers. Our three-pillar focus is based on diversifying and expanding our offerings for advertisers. We have strong relationships with more than 25,000 local advertisers across the U.S., and we partner with them to achieve their marketing goals. We sell advertising and marketing services to our customer base through both our owned and operated products, and we offer a full suite of omnichannel marketing solutions through Amplified. With advanced data-driven ad tech, specialized category expertise, stable custom video content, and powerful first-party data, Amplified is a strong partner for local and regional businesses looking to drive growth. We continue to see significant runway as we execute these strategies.
While Amplified is the growth engine for top advertising revenue, our massive owned and operated digital audiences fuel high-margin digital advertising revenue. These owned and operated digital products, infused with our valuable hyperlocal content, remain key advertising channels for our local communities. Our owned and operated properties attract massive audiences, and we're offering more video inventory and branded content opportunities to boost digital advertising. This revenue category is important as there remains growth potential by expanding our audiences, and this category represents our highest-margin digital advertising revenue. Combining all digital revenue sources, including digital subscriptions, digital advertising and marketing services, and digital services revenue from BLOX Digital, we expect to generate between $310 million and $330 million of digital revenue in FY 2024. The midpoint of our guidance represents a 70% growth rate over FY 2023.
With this level of execution, we're well on our way to achieving $450 million of digital revenue by 2028. With that, I'll hand it back to Tim to discuss our financials.
Thank you, Kevin. We recently just completed our second quarter. Thank you to those who joined our earnings call last Thursday. I would like to quickly recap some of our takeaways from the quarter. Our second quarter results were strong as we improved overall revenue trends, managed operating expenses, and grew Adjusted EBITDA. Digital subscribers increased 25% in the quarter, and digital-only subscription revenue was up 48% year-over-year. Adjusted EBITDA increased 5% year-over-year, the second consecutive quarter of EBITDA growth. We are confident in our digital transformation as the magnitude of the revenue opportunity is significant, and the digital products and services we sell are incredibly profitable. Our digital direct margin in the second quarter remained strong at 70%. This resulted in $49 million of digital direct margin, which represents a $2.5 million increase over the second quarter of last year.
We are focused on driving high-margin digital revenue, and as a result, we are steadily becoming sustainable solely from the revenue and cash flow generated from our digital products. Lee has a successful track record of effective cost management. In FY 2024, our business transformation efforts will yield between $45 million and $65 million in cost savings. Most of that is the result of actions taken last year. While we remain focused on operational excellence, reducing the cost structure of our legacy print business, and growing profits, our main priority is to drive long-term, sustainable digital revenue growth. Therefore, we continue to invest in talent and technology in the areas of our business tied to our digital future, and our commitment to high-quality local news remains steadfast. As an example of the investments we're making, earlier this month, we announced the hiring of Les Ottolenghi.
Les joined our team as Lee's Chief Transformation and Commercial Officer. He has significant executive expertise within the digital landscape, both within artificial intelligence and information technology. He's worked at Fortune 500 companies as well as at successful startups. Given his extensive background, digital acumen, and affinity to drive shareholder value, the addition of Les is a significant step in pursuing our digital transformation. Let's move to the balance sheet. Lee has an incredibly favorable credit agreement with Berkshire as our sole lender. The favorable terms of our credit agreement are extremely important for us as we execute our strategy. It allows us the ability to make the necessary investments in talent and technology that fuel recurring, sustainable revenue growth. The agreement was executed in 2020 and has a fixed interest rate and a 25-year maturity.
These favorable terms have been incredibly helpful in the rising rate environment we have seen over the last couple of years. In addition to a fixed interest rate and long tenor, there's no fixed amortization payments and no events of default tied to financial performance covenants. We make no pension contributions in the quarter as our pensions are overfunded in the aggregate. Finally, we continue to identify opportunities to monetize non-core assets. That facilitates accelerated debt reduction. We closed $3 million of asset sales this year, and we've identified an additional 25 million more of non-core assets to monetize. While we cannot be sure these deals will close, we do expect approximately $10 million in sales to close by the end of fiscal year 2024.
As a reminder, with solid execution of our three-pillar strategy as well as our commitment to improving our balance sheet, our goal is to achieve our target leverage ratio of under 2.5x. Before I hand it back to Kevin to wrap up, I would like to point everyone to our 2024 outlook for total digital revenue, digital subscribers, cash costs, and adjusted EBITDA. As a reminder, these remain unchanged throughout FY 2024. For the fiscal year, we expect total digital revenue to be in the range of $310 million-$330 million. We expect digital subscribers to total 771 million at the end of the fiscal year, and adjusted EBITDA is projected to be between $83 million-$90 million. With that, I will turn it back to Kevin.
Thanks, Tim. To recap, our three-pillar digital growth strategy is guiding our digital transformation and is the foundation of our investment thesis. As I mentioned previously, our strategy will guide Lee into becoming sustainable and vibrant solely from the revenue and cash flow from our digital products within five years. Doing so will allow us to increase our shareholder value through continued debt reduction and multiple expansion. Our second quarter results demonstrate strong digital growth with consistent execution of our three-pillar digital growth strategy. The tremendous progress on our digital transformation continues to reinforce we have the right strategy and the right team in place to achieve our long-term targets. To wrap up, I'd like to thank the entire Lee team for their efforts in driving our transformation.
As we continue our journey and achieve our long-term goals, we expect to drive significant value for our shareholders by converting debt to equity and through repositioning of Lee as a digital-first company. I'm now happy to answer any questions you may have.
Perfect. Kevin, Tim, thank you so much for that overview of the company and your willingness to share the presentation. As a reminder, we have about 10 minutes, so if you do have any questions, please feel free to type them into the Q&A box, and I will get to as many as I can. Guys, just kind of to kick things off here, when you look at your digital transformation strategy, obviously, and when you started this, digital revenue was only 21% of the total operating revenue, and now you're at 48%. You're going to get to over 50% in the next quarter and then beyond. In terms of that strategy, what do you see as your biggest risk near-term to not meeting your targets for 2024?
Yeah, I'll go ahead and Kevin jump in as you see fit. I think we really are confident in our targets in 2024 on the digital side. In particular, what we're seeing in our growth in digital units, we've got a great strategy and a good mousetrap. Pillar one strategies are really feeding the right engagement and fueling people down the funnel. So our pillar two strategies are also generating good results as well. So I think we feel really good about the digital subscribers and digital subscription side. On the advertising side, we are seeing an improved market from what we saw in the first half of the year, hoping that that can continue.
The last couple of months, we have seen our most profitable digital advertising opportunities, which is on our owned and operated products, start to see some really good revenue improvement, and that I would hope to continue for the rest of the year as well. Anything you'd add to that?
I would just say we have a long track record, 17 quarters of driving audience revenue, digital audience revenue, and that's all on track. We're also growing ARPA at the same time. We feel good about that. And likewise, Amplified Digital is on its growth trajectory too. So I feel very good about our digital prospects and meeting our digital guidance.
Perfect. Tim, you spent a little bit of time talking about valuation and the multiple rerating and the impact of removing debt. I know it's really hard to put a number on this, but how much of the current valuation, not decline, but how much of that is the market maybe not really understanding how positive and conducive to growth the Berkshire Hathaway debt agreement is? Because these terms are incredibly positive. They enable you to roll out your strategy: 9% fixed interest, no mandatory amortization payments. I guess, could you expand upon that a little bit more and just talk about how important that is for the company and the strategy to have those loan terms?
Yeah, I think that's a great point to highlight because I think oftentimes it's very easy to look on paper and see the leverage and just automatically assume significant risk. And I think the facts that you laid out from our credit agreement, the fact that it has a 25-year runway, a fixed interest rate, no fixed amortization payments, no events of default tied to financial performance covenants. There's basically very little way for us to default on this outside of just not paying interest. And so I think it's very easy to look on the surface and see a high-risk profile from a balance sheet perspective without taking all of those into account. Because from our perspective, that's a huge asset, a huge benefit for us to be able to make sure we're making the investments to drive the digital future.
So as I think tying that back into valuation, I think it's more people understand the benefits of our credit agreement and can see that the risk is moderated and really helpful for us to drive our transformation. You can start to then better value the digital growth and becoming sustainable from our digital products only.
Perfect. Thank you. I've got to ask, we've had many questions come in, but just focusing on print, and obviously, that environment hasn't been great. Can you maybe just discuss a little bit about the challenges of carrying out this strategy and having print advertising and print subscription revenue decline, potentially a little bit more than you were expecting?
Yeah, it's a good question. I mean, I think that the challenge that we've had is managing the volatility of print. It's hard to predict. It's hard to project what those trends are going to be, what the demands are going to be for both print advertising and print subscriptions. And so all of that underpins our desire to become not reliant on it. Not that we're going to force it away, but we are establishing a model that isn't reliant on the volatility of print. So as we look at our results over the last 12 months, from a print advertising perspective, we have seen the trends, the declines accelerate. I think some of that is due to some non-subscription products, which are more advertising products. We have eliminated some of those because they didn't meet our profitability standards.
And then on the print subscription side, we've gone through transforming our print product in some of our smaller markets that did have a small impact on revenue, had a bigger impact on cost. So from a cash flow perspective, it was better. But both of those will cycle the decisions that we made in the past. We'll cycle those in the latter half of 2024. But I do think that the core trends in print will continue at their current rate, at least that's our expectation.
The only thing I would add is while the volatility of print is a little bit worse than what we realized when we put the plan together initially, it's really not off the mark in the mid- to long-term, knowing that our goal is to be solely sustainable on our cash flow from digital-only products. So ultimately, it comes in different ways, but it doesn't really get us off where we're going.
Perfect. Tim, you touched upon this towards the end of your answer there, but the decisions that you made to decline the number of days of print, can you just talk a little bit more about the impact that had on maybe some of the gap results and also the cash flow in the most recent quarter?
Yeah. So on the print subscription side, you'll notice really starting in the last half of 2023, in particular, fourth quarter was the full quarter impact. We saw print subscription revenue trends, which were down in the mid-teens, for the first half of 2023 accelerate to get in the mid-20s, and we're seeing that hold into the first half of 2024. I'd say a big part of that, about half of that, is related to the daily print transformation that we did in some of our smaller markets. So that's quantified what we expect, and we do expect to cycle that fully as we get into the fourth quarter of this year.
Perfect. I feel like I asked this last time, but another one came in, so I'm going to get to it. Are political ad revenues a meaningful contributor to the overall business, if at all? And if so, do you expect political ad spend on the upcoming U.S. election to have any impact on expected revenues this year?
Yeah. So meaningful contributor so far this year, no. We do expect it to be a contributor as we get in the back, certainly the fourth quarter, probably more in our first quarter of 2025. So I think we have the opportunity for it to drive a $4 million-$5 million lift in ad revenue just from this political season.
I know that you've sold $3 million worth of assets year to date. You've identified $25 million that may or may not close this year and next year. Do you anticipate identifying more assets as we get closer to the 2028 goals that are going to help from a cash flow perspective?
Yes, we do. What we've got baked into our models is the $25 million that we've identified as of today, but there is more opportunity on top of that. Where these non-core assets come about is really in print production hubs. While we're constantly iterating on volumes and making decisions on efficiencies of where things are printed, there could be additional opportunity for us to centralize or outsource that would open up some real estate to monetize in the future. But what's baked in our model right now is the $25 million.
Perfect. We've got about a minute left. I'd just like to hand it back to you in case there's anything in closing that you'd like to leave us with.
Thank you for your interest, and thank you for joining the call.
Perfect. Well, Kevin and Tim, on behalf of Sidoti, thank you so much for your time this afternoon and your willingness to go through the presentation, to share your story, and to answer questions. For those of you in the audience, we thank you for being here. Thank you for your questions, and I'm sorry if we were unable to get to all of them, but I think we did our best time permitting. But Kevin and Tim, thanks again from all of us, and we hope everybody has a wonderful rest of the day.
Thank you.
Thank you.