Executive Summary / Key Takeaways

• Lee Enterprises is executing a digital-first transformation strategy, successfully pivoting from its legacy print business towards high-growth digital subscriptions and advertising services, achieving a significant milestone in Q3 2024 as digital revenue surpassed print.
• The company is aggressively leveraging Artificial Intelligence (AI) through strategic partnerships (Perplexity, ProRata AI, AWS) to enhance content personalization, create new advertising solutions, and position itself as a "last-mile intermediary" in the evolving AI-driven content economy, expecting early economics in FY 2025.
• Despite strong digital growth, recent financial performance, particularly in the first half of fiscal year 2025, was significantly impacted by secular print declines and a major cybersecurity incident in February 2025, resulting in operating losses and pressure on liquidity.
• Management has implemented cost reductions and expects improved digital revenue trends and positive free cash flow in the second half of FY 2025, supported by AI initiatives and recovery from the cyber event, while actively monetizing non-core assets to manage debt.
• Key factors for investors to monitor include the pace of digital revenue acceleration driven by AI, the effectiveness of cost management in the declining print segment, successful execution of asset sales, and the ongoing recovery and potential lingering impacts of the cybersecurity incident.

A Legacy Transformed: Lee Enterprises' Digital Pivot and the AI Frontier

Lee Enterprises, Incorporated, a company with roots stretching back to 1890, has long been a fixture in local news and information across the United States. Operating in 72 mid-sized communities spanning 25 states, Lee has historically served its markets through traditional print publications. However, recognizing the profound secular shifts impacting the media industry, the company has embarked on an ambitious and necessary digital transformation. This strategic pivot is not merely an adaptation but a fundamental reshaping of its business model, aiming to build a sustainable future on the bedrock of digital revenue streams.

At the heart of Lee's strategy is a three-pillar approach: growing digital audiences and engagement, expanding its digital subscription base, and diversifying its advertising and marketing solutions. This strategy is designed to leverage the company's core strength – trusted, intensely local news and information – and deliver it through modern, digital-first platforms, including websites and mobile apps.

The competitive landscape for local media is complex and rapidly evolving. Lee competes directly with other regional and national news organizations like Gannett (GCI), The New York Times Company (NYT), and News Corporation (NWSA), particularly in digital advertising and subscription markets. While larger national players like NYT command significant brand recognition and scale, and Gannett operates a vast network of local papers, Lee has carved out a position focused on mid-sized markets, aiming to differentiate through hyperlocal content and agile digital execution. Indirect competition from tech giants like Google (GOOGL) and Meta (META), which dominate the digital advertising ecosystem and news aggregation, presents a significant challenge by capturing a large share of digital ad spend.

Lee's response to this competitive pressure involves not just digital migration but technological innovation. A key differentiator is the company's aggressive embrace of Artificial Intelligence (AI). Lee is forging strategic partnerships with leading AI firms like Perplexity, ProRata AI, and Amazon Web Services (AWS) to enhance its digital offerings. These collaborations are designed to improve user experience through AI-driven personalization, making content more relevant and engaging. Early tests of a hyper-personalized consumer experience powered by AI and Lee's news network show promising adoption rates, already reaching 85% among engaged users.

Crucially, AI is also being leveraged to transform the advertising business. Through its Amplified Digital Agency, Lee has launched a suite of AI-powered solutions for local businesses, including A.I. Enablement, AI Social, and SmartSites.AI. A.I. Enablement is an AI-empowered advertising and automation solution designed to generate high-quality content for businesses, preparing them for the shift towards AI search channels. SmartSites.AI, an AI-powered website platform, aims to transform business pages into dynamic search and answer hubs, with early results indicating a five-to-one increase in user engagement and time spent compared to traditional sites. These technological advancements are intended to provide tangible benefits: increased user engagement drives subscription value, while AI-powered advertising tools offer local businesses more effective and targeted marketing solutions, potentially capturing market share from legacy web media companies and enhancing Lee's competitive moat in its local markets. The partnerships are structured to minimize upfront costs through pay-per-use and revenue-sharing models, tying spending directly to revenue growth.

Performance Under Pressure: Digital Gains Offset by Print Declines and Cyber Impact

Lee's strategic pivot has yielded significant results in its digital segments. On a trailing twelve-month basis, total digital revenue reached $303 million as of Q2 FY25, demonstrating a growth rate of more than 17% annually since fiscal year 2021. This growth is fueled by impressive performance in digital subscriptions and Amplified Digital. Digital-only subscription revenue grew 17.4% year-over-year in Q2 FY25 and 14.2% in the first six months of FY25, reaching 728,000 digital-only subscribers by the end of the quarter. Amplified Digital Agency also continues to grow, with annualized revenue exceeding $100 million and reporting 9% year-over-year growth on a same-store basis in Q2 FY25. These digital revenue streams boast high gross margins, reported at an impressive 70-72%, significantly contributing to the company's profitability profile. The company achieved a key milestone in Q3 FY24 when its total digital revenue surpassed print revenue, marking a critical inflection point in its transformation. By Q2 FY25, digital revenue represented 52.8% of total operating revenue.

However, the persistent secular decline in the legacy print business continues to weigh on overall performance. Total operating revenue in Q2 FY25 was $137.4 million, down 6.3% year-over-year. Print advertising revenue saw an 11.8% decline in Q2 FY25, while print subscription revenue fell 16.1%. Other print revenue, primarily commercial printing, also decreased by 10.6%.

Adding to the challenges, Lee experienced a significant cybersecurity incident on February 3, 2025. This attack caused a systems outage and operational disruption, impacting the company's ability to deliver print products, bill customers, and process payments. The incident resulted in $1.9 million of expenses in Q2 FY25, recorded within Restructuring and Other costs, which saw a 57.4% increase in the quarter compared to the prior year. The cyber event also hampered working capital, delaying customer statements and challenging collection efforts.

Total operating expenses decreased by 6.1% in Q2 FY25, primarily due to lower newsprint and ink costs (down 25.3% due to volume declines) and reduced depreciation and amortization (down 29.1% as assets became fully depreciated). Compensation expense remained relatively flat, with reductions in full-time employees offset by investments in digital talent and higher medical plan costs. Despite overall expense reductions, the increase in restructuring costs, driven by the cyber incident and ongoing business transformation efforts (including severance and facility closures), contributed to an operating loss of $4.5 million in Q2 FY25, similar to the prior year quarter, but an increased operating loss of $7.9 million in the first six months of FY25 compared to operating income in the prior year period. Net loss for Q2 FY25 was $12.0 million, and $28.2 million for the first six months, compared to $11.6 million and $10.4 million in the respective prior year periods. Non-GAAP Cash Costs were down 1.5% in Q2 FY25 and 1.0% in H1 FY25.

Managing Liquidity and Debt While Investing for the Future

Lee's balance sheet reflects the ongoing transformation and recent challenges. As of March 30, 2025, cash and cash equivalents stood at $4.7 million, a significant decrease from $9.6 million at the end of FY 2024. Cash required for operating activities totaled $8.1 million in the first six months of FY 2025, a notable shift from cash provided by operations in the prior year period, primarily due to the impact of operating results and the cyber incident's effect on working capital.

The company's debt structure is dominated by a single 25-year term loan with BH Finance LLC, with an aggregate principal balance of $453.5 million at a 9% fixed rate, maturing in March 2045. This long-term, fixed-rate debt provides stability and flexibility compared to market-rate financing. In response to the liquidity pressure from the cyber incident, BH Finance and BH Media Group waived interest and lease payments due in March, April, and May 2025, adding $7.5 million to the outstanding debt balance as of March 30, 2025.

To enhance liquidity and manage debt, Lee is actively monetizing non-core assets, primarily real estate. The company generated $6.1 million from asset sales in the first six months of FY 2025, following $13 million in sales in FY 2024. An additional $25 million of non-core assets have been identified for monetization, with $8 million expected to close by the end of FY 2025. Proceeds from these sales are directed towards debt reduction, although payments are contingent on future excess cash flow as defined in the credit agreement.

Management has implemented specific plans to maintain sufficient liquidity, including reducing operating and capital spending, particularly in the print business and non-revenue-generating future products, and focusing on improving accounts receivable collections as cyber recovery progresses.

Outlook: Betting on Digital Acceleration and AI Momentum

Looking ahead, Lee Enterprises' outlook is firmly tied to the continued execution of its digital growth strategy and the anticipated impact of its AI initiatives. Despite the challenging first half of FY 2025, management expects improved total digital revenue growth trends in the second half of the fiscal year. The new AI products and partnerships are specifically highlighted as key drivers expected to accelerate profitable and recurring digital revenue growth.

For the full fiscal year 2025, the company maintains its expectation for total digital revenue growth in the range of 7% to 10%. While Adjusted EBITDA in the first half lagged expectations, the updated outlook anticipates year-over-year growth in Adjusted EBITDA in the second half of FY 2025. Crucially, management expects free cash flow to be positive in the second half of FY 2025, driven by anticipated top-line improvement, cost structure changes, and reduced capital and restructuring spending.

The long-term target remains ambitious: achieving $450 million of digital revenue by 2028. The AI advancements are seen as accelerating the pace towards this goal. The company is also targeting digital gross margin to exceed remaining SG&A costs by 2026, signaling a path towards sustainability independent of the print business.

Risks to this outlook include the potential for continued, faster-than-expected declines in print revenue, which could offset digital gains and pressure margins. The full financial and operational impact of the cybersecurity incident, including potential long-term effects on customer relationships or unforeseen costs, remains a factor. While the VPPA lawsuit settlement is covered by insurance, other legal proceedings could arise. Potential increases in minimum wage laws could impact labor costs. The shareholder rights plan, extended to March 2026, could deter potential acquisition offers not supported by the Board. Successful execution of the asset monetization plan is also important for liquidity management.

Conclusion

Lee Enterprises is navigating a complex transition, striving to transform a legacy print business into a thriving digital enterprise. The core investment thesis rests on the company's ability to continue driving robust growth in its digital subscription and advertising segments, leveraging its trusted local news content and increasingly sophisticated AI-powered technology. The recent cybersecurity incident highlighted the operational and financial vulnerabilities inherent in this transformation but also demonstrated the company's resilience and the support from its key lender.

While the path forward involves significant challenges, particularly managing the decline of the profitable print business and the lingering effects of the cyber attack, the momentum in digital growth, the strategic focus on AI innovation, and proactive cost management provide a credible pathway towards future sustainability. Investors should closely monitor the pace of digital revenue acceleration, the realization of cost savings, the success of asset sales, and the company's progress towards its digital sustainability targets, particularly the expectation for positive free cash flow in the latter half of FY 2025, as key indicators of the investment thesis unfolding.