Okay, we'll go ahead and get started. Good afternoon, everyone. Welcome back to day 2 of Sidoti's August Microcap Conference. My name is Daniel Harriman, and I'm an analyst here at Sidoti. This afternoon, we're gonna hear from Lee Enterprises. That's ticker L-E-E. We have the company's President and CEO, Kevin Mowbray, here, as well as the company's Chief Financial Officer and Treasurer, Tim Millage. As usual, we're gonna give them about 20 minutes to go through the presentation, after which time I'm gonna open it up to Q&A for about 10 minutes. If you do have any questions at any time during the presentation, please feel free to just type it into the Q&A box, and time permitting, we'll get to as many as we can. Please join me in welcoming Lee to the conference. And with that, I'm gonna hand it over to Tim.
Thank you all for being here.
Great. Thank you, Daniel, and good afternoon, everyone. I am Tim Millage, Lee's Vice President, CFO, and Treasurer. Joining me today is Kevin Mowbray, Lee's President and CEO. 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 moment to share a brief overview of Lee. Lee is a digital-first subscription platform providing communities with valuable, intensely local news, and as a leading provider of local news, information, and advertising in 73 markets and communities, we have content producers providing high-quality, engaging news and information that is vital to our readers. Our products are concentrated in mid-sized 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 the STLtoday, a leading digital product in St. Louis; Buffalo News, Richmond Times-Dispatch, and the Omaha World-Herald. Lee's digital marketing service brand is Amplify Digital, which competes across all markets in the U.S. but is concentrated in Lee markets. BLOX Digital is a rapidly growing SaaS company and a leader in North American market share. Our total revenue over the last 12 months is $617 million. Our three-pillar digital growth strategy is transforming Lee into a vibrant, digitally-centric company as we are transforming the composition of our revenue. I'm hopeful that even for those that do not regularly follow Lee, after this conversation today, you will take away three main points of who Lee is.
Lee is, one, a digital-first local content subscription platform in strong mid-sized communities that span 73 markets in 26 states. Led by our 3-pillar digital growth strategy that leverages the 8 million known users and 25,000 local advertising relationships to drive our digital transformation. The digital transformation is well underway at Lee, and we are well-positioned to drive value for all of our shareholders. So with these 3 points in mind, I will kick it over to Kevin to get the conversation started.
Thanks, Tim. I'm Kevin Mowbray, Lee's President and Chief Executive Officer. I share Tim's excitement to talk about Lee's digital future. We're happy to surpass the revenue inflection point this past quarter. Digital revenue now represents more than 50% of our total operating revenue. This important milestone helps us stabilize our operating performance, making us less reliant on declining trend business. What's more, given the profitability of our digital revenue, total revenue growth also means cash flow growth. We have demonstrated industry-leading growth in several key digital categories. First, we're the fastest-growing digital subscription platform in local media from both a revenue and subscriber perspective. Digital subscriptions have grown 41% annually over the last three years, nearly doubling the nearest industry peer.
We've also grown digital subscribers faster than anyone else while demonstrating a high value to our readers through the execution of price increases to our digital subscribers. Secondly, our digital agency, Amplify Digital, has had an outstanding 30% growth rate over the last three years, far outpacing others within the industry. Our third quarter Amplify Digital revenue is $26 million, representing 12% year-over-year growth, as well as annualized revenue of more than $100 million. The industry-leading growth in these key areas has driven the transformation of revenue to where we are today at over 50% digital. And as a reminder, digital revenue represents just 21% of total revenue back in 2020, prior to the launch of our three-pillar digital growth strategy in 2021. We're incredibly encouraged by the progress we've made up to this point.
The aim of our digital transformation is to be sustainable solely from the cash flow generated from our digital products. Later in the discussion, we'll share another key milestone in our digital transformation we expect to reach in 2028. For now, I'll turn it back to Tim to discuss our investment thesis.
With a sound strategy, industry-leading digital results, and a rapidly transforming revenue mix, Lee is well positioned to drive long-term value for our shareholders. Lee's digital transformation is the foundation of our investment thesis.... As the mix of our revenue transforms to include more profitable and growing digital revenue, we expect stable and growing top line and free cash flow growth. This transformation positions Lee well to drive substantial value for shareholders. As we continue to execute and generate industry-leading growth, there is a strong case for multiple expansion beyond what we're seeing today. Achieving our long-term target of $450 million in digital revenue has the potential to create value for our shareholders through multiple expansion.
I'm hopeful that you can connect the dots from our strategy to the sound investment thesis and see the reason for our optimism, and that Lee is positioned well to drive value for stakeholders. Now I'll turn it back to Kevin to discuss the strategy.
As I mentioned earlier, Lee remains an industry leader in several digital categories, with the fastest-growing digital subscription platform in local media from both a revenue and subscriber perspective. Our digital subscription unit growth has outpaced industry peers since we implemented our digital transformation strategy four years ago. We now have more than 748,000 digital subscribers, which is up a significant 23% compared to prior year. We've generated significant and consistent revenue growth from our digital subscribers. This revenue category has grown 41% annually over the last three years, nearly doubling the nearest industry peer. Simply put, we're growing digital subscribers faster than anyone else, while demonstrating a higher value to our readers and executing price increases for our digital subscribers.
This clearly demonstrates our distinguished presence in our local markets, as well as the strong demand for our valuable local content that we provide. We've expanded the amount of local news delivered to our readers, ultimately, to give them more opportunities to engage and subscribe. We've strengthened our community connections and recommitted to leading conversations throughout our communities we serve. Publishing local content that reflects the people and the work they do to uplift these communities is the driving force behind our digital subscription business. Our hyperlocal content is a key driver of our digital transformation, as our key content provides the most robust opportunities to drive monetization through subscriptions, advertising, potential content licensing, and other opportunities. Our digital agency, Amplify Digital, grew 12% in the third quarter, and annualized revenue at Amplify Digital is more than $100 million.
This represents an outstanding 30% annual growth rate over the last three years, far outpacing others in the industry. These industry-leading growth rates in these revenue streams are driving our digital transformation. Total digital revenue has grown to $290 million over the last 12 months, a 17% growth rate annually over the last three years. This digital growth has resulted in rapid change in our revenue composition, helping us to achieve the revenue inflection point I highlighted earlier. Lee is rapidly transforming from a print-centric to a digital-centric company. Our focus is on expanding digital audiences, growing our digital subscriber base and revenue, and diversifying expanding our offerings for local advertisers. The long-term results of our strategy are expected to generate $450 million of recurring sustainable digital revenue within five years.
With that level of performance, Lee is sustainable solely through the cash flow from our digital products. I'd now like to share some insight into the long-term trajectory of our digital subscription base. We've generated significant and consistent revenue growth from digital subscribers. This revenue category has grown 41% annually over the last three years. Simply put, again, we're driving digital subscriptions and subscribers faster than anyone else, while also demonstrating a higher value to our readers and executing price increases to these digital subscribers. This clearly demonstrates the distinguished presence we have in our local markets, as well as the strong demand for the valuable content we provide. 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 8 million known users. Understanding our users, converting more and more of our vast addressable market to digital subscribers is the next key part of our strategy. We have made tremendous progress towards our digital subscription subscribers. We expect to finish 2024 at 771,000 digital subscribers. We expect to reach 1.2 million digital subscribers by 2028 as we continue to execute our digital transformation. The acceleration of our digital subscription revenue growth over the past few years has been driven by investments we've made in top talent in the areas of content, branding, and consumer marketing.
These investments are producing strong results through engaging local content, effective branding campaigns, and KPI-driven marketing campaigns. With these investments and initiatives, we expect to achieve $150 million of recurring digital subscription revenue growth by fiscal 2028, fueled by 1.2 million digital subscribers. Our third pillar focuses on expanding digital advertising services for local 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 our owned and operated products, as well as our full suite of omnichannel marketing solutions through Amplify Digital Agency. With advanced data-driven ads, specialized category expertise, scalable custom video content, and powerful first-party data access, Amplify Digital Agency is a strong partner for local and regional businesses looking to drive growth.
We continue to see a significant growth runway as we execute these strategies. While Amplify Digital Agency is the growth engine for top-line advertising revenue, our massive owned and operated digital audience yields high-margin digital advertising revenue. These owned and operated digital products, infused with our hyperlocal content, remain a key advertising channel for our local communities. And our owned and operated properties attract massive audiences and are driving more video inventory and branded content opportunities to boost advertising, digital advertising revenue. And there's massive growth potential to drive even more high-margin revenue as we expand our audiences. Combining all of our digital sources, including digital subscriptions, digital advertising and marketing services, digital services revenue from BLOX Digital, we expect to end the fiscal year with at least $310 million in digital revenue.
The lows of our 2024 outlook represents a growth rate of 13% over 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 over to Tim to discuss our most recent financial results.
Thank you, Kevin. We recently just completed our third quarter. Thanks to those who joined our earnings call earlier this month. I'd like to provide some key takeaways from the quarter. We're thrilled to have achieved the revenue inflection point in Q3, where digital revenue is more than 50% of total operating revenue. We saw strong digital revenue growth across all digital categories, including an increase of 9% year-over-year in total digital revenue. We continued to manage our costs carefully, which includes making investments to drive our digital transformation. As we mentioned earlier, we are extremely confident in our digital transformation for two reasons. One, the magnitude of the revenue opportunity is significant. And two, the digital products and services we sell are incredibly profitable.
We've been keenly focused on allocating resources that will create the most value, which for us is our high-margin digital subscription revenue, as well as our owned and operated digital advertising revenue. Continuing to scale these digital revenue streams is expected to create significant long-term revenue and cash flow, as you'll see on the slide. I'll highlight a few achievements since the beginning of our digital transformation in 2021. Digital revenue has grown more than 17% annually, and that has translated to 14% growth in digital gross margins over that time span. Our digital margin is also an impressive 72%, meaning our digital business is highly profitable. Replacing our print revenue with growing and profitable digital revenue will help us achieve long-term digital sustainability. We expect that by 2026, the gross margin from our digital products will exceed the company's remaining SG&A costs.
Said differently, within two years, we expect the revenue from our digital business to cover all of these costs, excluding any print costs. The growth in our digital business is expected to continue as we are still scratching the surface of our addressable market for digital subscriptions and digital marketing services. It's quite exciting to be this close to being sustainable only from our digital product... digital revenue streams. I hope you can see the end goal with our digital transformation. I'm excited to be able to share more updates in the coming months regarding our progress towards this milestone. Lee has a successful track record of disciplined and effective cost management. In 2024, our business transformation efforts will yield between $75 million and $80 million in cost savings. Most of this 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 profit, our main priority is to drive long-term, sustainable digital revenue growth. Therefore, we continue to invest in the talent and technology in areas of our business tied to our digital future, and our commitment to high-quality local news remains steadfast. Next, I'll move to the balance sheet. Lee has a strategic asset in our favorable credit agreement with Berkshire Hathaway, our sole lender. The longevity of our debt is an advantage for us, as it enables us the flexibility to make the necessary investments in talent and technology that fuel our strategy. The agreement was executed in 2020, has a fixed interest rate, and matures in 2045. These terms have been incredibly helpful in the rising rate environment we have seen over the last several years....
In addition to a fixed interest rate and long tenor, there are no fixed amortization payments and no events of default tied to financial performance covenants. Last, we continue to identify opportunities to monetize non-core assets, which facilitates an accelerated debt repayment. We've closed over $13 million of asset sales this year, and have identified an additional $25 million of non-core assets to monetize. The monetization of these non-core assets will propel debt reduction. And with that, I will turn it back to Kevin.
Thanks, Tim. We believe our solid third quarter results reflect notable and sustained momentum in our digital transformation. We believe there's tremendous opportunity ahead of us, as we're well-equipped to capitalize on this quarter's momentum moving forward. Our three-pillar digital growth strategy is guiding our digital transformation, and is the foundation of our investment thesis. Our strategy will guide lee to becoming sustainable solely from our digital products. As we continue our journey and achieve our long-term goals, we expect to drive significant value for our shareholders. Thank you.
Perfect. Kevin, Tim, thank you both so much for the presentation and sharing your strategy. We've had quite a few questions come in, but just as a reminder, if you do have any questions, please feel free to type it into the Q&A box. We've got about 10 minutes. Guys, just to kick it off, Tim, you had talked about the debt, and obviously, that's seen as a positive for the company because of the relationship with Berkshire Hathaway and the terms that are pretty light in terms of covenants. But, one question came in about had you had any discussions with Berkshire about potentially converting their debt to equity?
It's an interesting concept. I think what I'd say is we have a great relationship with our sole lender. We speak with them probably around about quarterly. And I think from our perspective, from their perspective, you know, happy with the arrangement that we have. And as I talked about, it is a strategic asset for us. You know, it's a fixed interest rate of 9%, you know, that's been incredibly helpful for us. And then, you know, having the maturity at 25 years out, with no fixed amortization payments or events of default tied to a financial performance covenant, it really allows us flexibility to affect this digital transformation.
Meaning, more specifically, we can, you know, we can leverage operating expenses and the investments we need, you know, and capital to make this, this turn on the digital transformation. So all else we said, we're happy with the arrangement that we have with, Berkshire, and I believe they are as well.
That's great. Thank you. And then a question about pricing. Obviously, you know, in recent months, the average subscription rates have gone up as introductory rates have fallen off. Can you provide more of an overview about your pricing strategy, and how should we think about prices moving forward as those introductory rates really do tail off here in the coming months to years?
Yeah, I'll go ahead and kick that off. So, you know, we have a dynamic pricing structure in regards to our digital subscriptions. You know, we have seen some nice lift on ARPU over the last year, up about 20%, this year so far. And I think it really... It's a comprehensive marketing program that starts with brand. Well, it starts with the content. You know, you got to have the hyperlocal content that is engaging, that's driving results. You know, we also have branding campaigns that fuel the growth in digital subscriptions and the rates.
And we have, you know, the sophisticated marketing tactics that are really, you know, improving the cost of acquisition of new subscribers and, you know, converting those from an introductory offer to our full rate offer. But really, it all stems from the hyperlocal content that's wanted and engaging in our local markets.
One thing I would add is, we know a lot about our readers. We know how long they've subscribed, we know what interest level, content-wise, they come to us, and so we have a lot of data analysts that are constantly looking at and moving content that is highly valuable to them, which gives us the ability to drive ARPU, and as we've demonstrated over the last four years, we've made a significant progress in driving those kinds of results.
Perfect. And then, with the goal for digital-only subscribers at about 771,000 this year, do you have a number as to what your gross retention rate is on digital subscribers over the last 12 months or so?
Yeah. So we look at retention at a very detailed level, grouping our consumers into different buckets. You know, in particular, we do have introductory offers, and we do see higher retention or higher churn on those introductory offers moving to full-price offers. I think in the core, we are seeing improvement. What I would say is, you know, I think it represents an opportunity for us, in terms of an opportunity to improve our retention rates on our digital subs, and I think that can drive even more subscriptions and revenue for us going forward.
Perfect. And then for those that are newer to the story, a question has come in. For the 2028 goals, in terms of 1.2 million digital subscribers, $450 million in digital revenue, if the goals are achieved by 2028, or even in a great scenario beforehand... How should investors think about the profitability of the company, especially with, you know, the digital margins driving everything?
Yeah, I think that's a great question. Right now, digital margins on our digital business are around 72%. We do think as we move forward looking in our models, that will remain really high. It's gonna depend somewhere on the mix, but I do expect it to remain really high. One of the slides that we've put out is the growth in digital margins over the next several years and what it does to the company's cash generation.
And really what you see is, by the time we get to that point in 2028, you know, the free cash flow generation is replaced with just the digital business, meaning, you know, we would expect profitability to be similar to what it is today as we reach our goals.
Perfect. And then I can't get away from this question, but the election in November, can you talk about any growth you may be seeing right now or expect to see with the election cycle heating up?
Yeah, I'll take it. You know, we're in a lot of markets where there's some significant political races going on, Montana, the Carolinas. All of our market leaders are tuned into the political PAC money that's happening in their markets. They've got those contacts, those relationships. We expect to see between $3 million and $4 million in political revenue in the coming months.
Perfect. Tim, going back to monetization that you had touched on and the identification of, I believe, $25 million in non-core assets, is that a number that you expect to be changing over time? Do you think there's an opportunity to identify more than the 25, or is for the near term, is that what you're seeing?
Yeah, that number will evolve as operations evolve. It is, you know, something that we look at regularly to identify additional opportunities. But that 25 is what we've earmarked right now, identified as, you know, if market were available, we could sell. But that number will grow over time as we continue to, you know, consolidate production operations as well as, you know, become more of a digital pure play, as opposed to have some of those legacy costs around.
And then I know you both touched on the amount of data and understanding that you have of your readers. Can you give us a sense of what the breakdown of the demographic is? And then focusing mostly on younger readers, potentially, is that a demographic that could present a growth opportunity for the company?
Yeah, I would say, absolutely, it does. It represent a growth opportunity for us is, I don't know if you have anything.
Yeah, I mean, what I would say is, you know, we have the three pillars that I think a lot of you are familiar with. In those three pillars, we've got, you know, audience strategies aimed at younger demographics, and they're well underway. What I would say collectively is we skew slightly older, but we still have a lot of younger younger demographics looking at our content because we're hyper-local, so they wanna know what's going on with the local high school and, you know, collegiate sports teams in our markets. We publish things like the honor roll for us, the local universities, colleges, and high schools. So we've got all kinds of content in our digital platforms that younger generations like to consume.
Then, another question has come in. Obviously, the company has a lot going on with the organic digital strategy and also the debt that you're looking to pay down, over time. Are you thinking at all about any acquisition opportunities, or do you think that you may have that ability in the future?
Yeah. And I think we do have the opportunity, you know, as an acquisition would accelerate the digital transformation. I think the way we're spending more time evaluating diversified revenue opportunities. You know, can we monetize content in a different way than we have before? Better leveraging our content, better leveraging the data. I think that is probably more of an upside than any M&A transactions, but certainly open to it, and have the ability to do that.
And I'm gonna try to squeeze in one more, if that's okay. But, I can't leave the presentation without talking about AI. And, just a question, a general question about, if AI tools would have any material impact on driving traffic to Lee properties?
Absolutely. I mean, I'll jump in first, and Tim, you can jump in. You know, what AI gives us the ability to do is to see when people are coming into our digital platforms, what they are consuming, and between that, our archives and other content that we can generate, we can give them a really robust set of, you know, content, not only on our sites, but other sites where we have access to, push that sort of content to them. And we're, you know, moving the ball in that direction pretty quickly, I would say. So we think that's a huge opportunity for Lee, you know, going forward.
Perfect. Well, we just hit the time. So, Kevin, Tim, thank you so much for being here and your willingness to share Lee's story. We appreciate all the information and wish you the best of luck in the coming quarters. For those of you in the audience, thank you for your participation. Thank you for your questions. We got to as many as we could, time permitting, but please join me again in thanking Lee for their time and their willingness to share their strategy moving forward.
Thank you all.
Thank you.
Take care.
Yeah, thank you. Bye.