In the midst of a battle between its two largest shareholders, the critical question of whether Tronc Inc. (NASDAQ: TRNC) can reach its 2017 revenue guidance of $1.6 billion has been almost entirely lost. How it performs compared to this guidance may have much more to do with Tronc’s share price than the ownership of the company will.
Tronc’s revenue for 2016 was $1.61 billion. Guidance for 2017 is in a range of $1.57 billion to $1.60 billion. Adjusted EBITDA (see note below), which is among Tronc’s primary measures of its financial status, was $181 million last year. Tronc’s guidance for 2017 is in a range of $185 million to $195 million. Both sets of forecast numbers are ambitious against the backdrop of the ongoing erosion in revenue and margins across the entire newspaper industry.
Tronc’s success is based to some extent on a reorganization that puts revenue from its properties into two divisions. One, TroncX, is made up primarily of the company’s digital revenue, which covers advertising, online only subscriptions and mobile revenue. Sales in the division are expected to be fueled to some large extent by content created with the help of artificial intelligence (AI) and an ambitious goal of 2,000 videos a day. Last year, TroncX had revenue of $236 million and adjusted EBITDA of $41 million. The company’s other large unit is TroncM, which is mostly the Tronc legacy print products. TroncM had revenue of $1.4 billion last year and adjusted EBITDA of $160 million.
TroncX will need to carry the load of any corporate-wide increase in revenue and, likely, bottom line improvement. Digital revenue at least has an opportunity to grow. The company’s legacy properties almost certainly won’t. TroncX needs to prove that readers of its local papers are prepared to pay for digital only subscriptions and that Tronc’s properties can create online content that will draw a growing number of advertisers who are willing to pay a premium for the content created by AI and burgeoning video offerings.
For now, the primary news regarding Tronc is about the fight between chairman Michael Ferro and Vice Chairman Patrick Soon-Shiong, who has not been reappointed to the board. Ferro recently strengthened his position as Tronc bought out its third largest investor, Oaktree Capital. The institution had been critical of Ferro. Tronc paid Oaktree $56.2 million for 3.75 million shares. Ferro also got Tronc’s board to agree that he could move his ownership percentage from 25% to 30%. Soon-Shiong has asked for the same right.
Tronc’s share price is near $14.50, against an offer of over $18 made by Gannett Co. Inc. (NYSE: GCI) last year as part of an unsuccessful takeover. Ferro’s argument is that Tronc’s share price can get back to $18. Presumably to reach that goal, Tronc will need to bring in between $1.57 billion and $1.60 billion, and adjusted EBITDA remains at a range of $185 million to $195 million. The portions of the company owned by Ferro and Soon-Shiong may be academic.
Note: Adjusted EBITDA is defined by Tronc as net income before equity in earnings of unconsolidated affiliates, income taxes, interest expense, other (expense) income, realized gain (loss) on investments, reorganization items, depreciation and amortization, and other items that the company does not consider in the evaluation of ongoing operating performance. These items include stock-based compensation expense, restructuring charges, transaction expenses and certain other charges and gains that the company does not believe reflect the underlying business performance (including spin-related costs).