Lee Enterprises Reports Results for First Fiscal Quarter

Lee Enterprises, Incorporated (NYSE:LEE), a major provider of local news, information and advertising in 50 markets, today reported preliminary(1) earnings of 18 cents per diluted common share for its first fiscal quarter ended December 28, 2014, compared with earnings of 22 cents a year ago. Excluding unusual matters, adjusted earnings per diluted common share(2) totaled 22 cents, compared with earnings of 24 cents a year ago.

Mary Junck, chairman and chief executive officer, said: "We're off to a strong start in FY2015 with total digital revenue continuing to grow at an impressive pace — up 25.6% in the quarter. Our audiences remain massive as mobile, tablet, desktop and app page views increased 7.7% to 226 million and unique visitors in the month of December 2014 increased 7.8% to 28 million. Our latest independent research shows that over the course of one week our newspapers and digital products reach almost 80% of all adults and almost three-quarters of adults ages 18-29 in our larger markets."

"Also of significant note, we continued our now more than six year run of strong and stable cash flow with unlevered free cash(2) flow totaling $154.9 million for the last twelve months ended December 28, 2014. And we aim to keep the string going."

She added: "Lee's full-access subscription model helped produce quarter-over-quarter subscription revenue growth, exceeding previously announced guidance. And through our business transformation efforts we exceeded our cash cost reduction goal for the quarter."

She also noted the following financial highlights for the quarter:

• Total digital revenue increased 25.6% from the same quarter a year ago, our fifth consecutive quarter of double digit growth;
• Digital advertising and marketing services revenue increased 7.1% and mobile advertising revenue, which is included in digital advertising, increased 32.4%;
• Subscription revenue, excluding the subscription-related expense reclassification discussed more fully below, increased 0.3% and we expect full year 2015 subscription revenue, excluding the subscription-related expense reclassification, to increase 2.5%-3.0%;
• Total cash costs(2), excluding the subscription-related expense reclassification, decreased 2.1%. Our ongoing cost control will continue and we anticipate full year cash costs, excluding the subscription-related expense reclassification, to decrease 0.5%-1.0% in 2015; and
• Debt was reduced $20.3 million in the quarter and another $12.3 million since then.

FIRST QUARTER OPERATING RESULTS

Operating revenue for the 13 weeks ended December 28, 2014 totaled $176.2 million, a decrease of 0.7% compared with a year ago. Excluding the impact of a subscription-related expense reclassification as a result of moving to fee-for-service delivery contracts at several of our newspapers, operating revenue decreased 3.4%. This reclassification increases both print subscription revenue and operating expenses, with no impact on operating cash flow(2) or operating income. Certain delivery expenses were previously reported as a reduction of revenue. A table later in this release details the impact of the reclassification on revenue and cash costs.

Combined print and digital advertising and marketing services revenue decreased 5.6% to $115.5 million, with retail advertising down 6.6%, classified down 3.4% and national down 4.9%. Retail preprint advertising decreased 8.1%. Combined print and digital classified employment revenue increased 3.0%, while automotive decreased 9.9%, real estate decreased 7.8% and other classified decreased 0.9%. Digital advertising and marketing services revenue on a stand-alone basis increased 7.1% to $19.9 million and now totals 17.3% of total advertising and marketing services revenue. Mobile advertising revenue increased 32.4%. Print advertising and marketing services revenue on a stand-alone basis decreased 7.9%.

Subscription revenue increased 10.9%. Excluding the impact of the subscription-related expense reclassification, subscription revenue increased 0.3%. Our average daily newspaper circulation, including TNI, MNI and digital subscribers, totaled 1.1 million in the 2015 Quarter. Sunday circulation totaled 1.5 million. Amounts are not comparable to the prior year period due to changes in measurements by the Alliance for Audited Media.

Total digital revenue, including advertising, marketing services, subscriptions and digital businesses, totaled $27.2 million in the quarter, up 25.6%.

Cash costs increased 1.6% for the 13 weeks ended December 28, 2014. Compensation decreased 0.3%, with the average number of full-time equivalent employees down 3.5%. Newsprint and ink expense decreased 16.2%, primarily the result of a reduction in newsprint volume of 13.3%. Other operating expenses increased 7.3%. Excluding the impact of the subscription-related expense reclassification, cash costs decreased 2.1%. We expect our cash costs, excluding the subscription-related expense reclassification, to decrease 0.5%-1.0% in 2015.

Operating cash flow decreased 6.8% from a year ago to $46.0 million. Operating cash flow margin(2) decreased to 26.1%, compared to 27.8% a year ago. Including equity in earnings of associated companies, depreciation and amortization, as well as unusual matters in both years, operating income totaled $37.5 million in the current year quarter, compared with operating income of $40.2 million a year ago. Operating income margin was 21.3% in the current year quarter, compared with 22.7% a year ago. The subscription expense reclassification reduced operating cash flow margin and operating income margin by 0.8% and 0.6%, respectively.

Non-operating expenses increased 1.3% for the 13 weeks ended December 28, 2014. Amortization of debt financing costs were $1.1 million in the current year quarter compared to $0.1 million in the prior year quarter. We also recognized $1.3 million of non-operating expense in the current year quarter due to the change in fair value of stock warrants issued in connection with our refinancing in 2014. Interest expense decreased 9.8% in the current year quarter due to lower debt balances and non-cash interest expense of $1.2 million in the prior year quarter. Income attributable to Lee Enterprises, Incorporated for the quarter totaled $9.8 million, compared with income of $11.9 million a year ago.

ADJUSTED EARNINGS AND EPS FOR THE QUARTER

The following table summarizes the impact from unusual matters on income attributable to Lee Enterprises, Incorporated and earnings per diluted common share. Per share amounts may not add due to rounding.

SUBSCRIPTION EXPENSE RECLASSIFICATION

Certain results, excluding the impact of the subscription-related expense reclassification, are as follows:

Approximately $4,444,000, or 92.4% of the reclassification impacts revenue and cash costs of our Lee Legacy operations, and approximately $363,000, or 7.6% impacts Pulitzer.

FULL ACCESS SUBSCRIPTION INITIATIVE

As previously reported, we launched our full access subscription initiative in April 2014. As of today, 30 markets have been launched and we are on track to launch all of our markets before June 2015. More than 200,000 subscribers have activated their access to our digital content to date. As previously reported, due to the timing of the rollout and subscriber renewal dates, the bulk of the positive revenue from this initiative should be realized in 2015 and we expect 2015 subscriber revenue, excluding the subscription-related expense reclassification, to increase 2.5-3.0%.

DEBT AND FREE CASH FLOW(2)

Debt was reduced $20.3 million in the quarter and by an additional $12.3 million since then. Including $32.0 million borrowed to pay 2014 refinancing costs that has since been repaid, debt has been reduced $80.5 million in the last twelve months ended December 2014.

Unlevered free cash flow totaled $45.8 million in the current year quarter compared to $50.1 million in the same quarter a year ago and $154.9 million over the last twelve months. Liquidity at December 28, 2014 totaled $48.5 million compared to $28.2 million of required debt principal payments over the next twelve months.

CONFERENCE CALL INFORMATION

As previously announced, we will hold an earnings conference call and audio webcast later today at 9:00 a.m. Central Standard Time. The live webcast will be accessible at www.lee.net and will be available for replay two hours later. Several analysts have been invited to ask questions on the call. Questions from other participants may be submitted by participating in the webcast. The call also may be monitored on a listen-only conference line by dialing (toll free) 888-510-1767 and entering a conference passcode of 108037 at least five minutes before the scheduled start. Please note that this is a different number than what was previously communicated. Participants on the listen-only line will not have the opportunity to ask questions.

ABOUT LEE

Lee Enterprises is a leading provider of local news and information, and a major platform for advertising, in its markets, with 46 daily newspapers and a joint interest in four others, rapidly growing digital products and nearly 300 specialty publications in 22 states. Lee's newspapers have circulation of 1.1 million daily and 1.5 million Sunday, reaching over three million readers in print alone. Lee's websites and mobile and tablet products attracted 27.6 million unique visitors in December 2014. Lee's markets include St. Louis, MO; Lincoln, NE; Madison, WI; Davenport, IA; Billings, MT; Bloomington, IL; and Tucson, AZ. Lee Common Stock is traded on the New York Stock Exchange under the symbol LEE. For more information about Lee, please visit www.lee.net.

FORWARD-LOOKING STATEMENTS — The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. This release contains information that may be deemed forward-looking that is based largely on our current expectations, and is subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those anticipated. Among such risks, trends and other uncertainties, which in some instances are beyond our control, are:

• Our ability to generate cash flows and maintain liquidity sufficient to service our debt;
• Our ability to comply with the financial covenants in our credit facilities;
• Our ability to refinance our debt as it comes due;
• That the warrants issued in our refinancing will not be exercised;
• The impact and duration of adverse conditions in certain aspects of the economy affecting our business;
• Changes in advertising demand;
• Potential changes in newsprint, other commodities and energy costs;
• Interest rates;
• Labor costs;
• Legislative and regulatory rulings;
• Our ability to achieve planned expense reductions;
• Our ability to maintain employee and customer relationships;
• Our ability to manage increased capital costs;
• Our ability to maintain our listing status on the NYSE;
• Competition; and
• Other risks detailed from time to time in our publicly filed documents.

Any statements that are not statements of historical fact (including statements containing the words “may”, “will”, “would”, “could”, “believes”, “expects”, “anticipates”, “intends”, “plans”, “projects”, “considers” and similar expressions) generally should be considered forward-looking statements. Readers are cautioned not to place undue reliance on such forward-looking statements, which are made as of the date of this release. We do not undertake to publicly update or revise our forward-looking statements, except as required by law.

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