Friday, July 25, 2008

Why more newspaper cuts may lie ahead

For all the cost cutting that has traumatized the newspaper industry this year, profitability is falling far faster than sales, suggesting that deeper cuts may be necessary if the industry is to sustain its traditional operating margins.

In the first part of the year, revenues have fallen by 9.4% in the newspaper divisions at half a dozen major publicly held companies, according to an analysis of the earnings reports issued by them in recent days. Despite aggressive cost cutting in the period at most companies, the operating profits for the same group plunged 25.3%. Thus, profits fell 2.7 times faster than sales dropped.

Unless sales improve or the industry is willing to accept lower profitability in the future, the companies evidently would have no choice but to consider even further spending trims.

The companies covered in this analysis were Journal Communications (JRN), Gannett (GCI), Lee Enterprises (LEE), McClatchy (MNI), New York Times Co. (NYT) and Scripps (SSP), which report their results in sufficient detail to enable this analysis and also represent a fair composite of industry performance.

Each of the companies in recent days reported lower quarterly sales and earnings. For all but Lee, the data included in this analysis reflect the company’s performance in the first six months of the year. In the case of Lee, the data are based on its performance in the first nine months of its fiscal year.

The analysis stripped away the performance of non-newspaper divisions and such one-time events as the sale last year of the NYT broadcast group or the writedowns that several companies are taking this year to reduce the value of the goodwill associated with certain acquisitions. Continued sagging sales, goodwill writedowns and hefty interest payments in the cases of several pubishrs were responsible for the deep earnings declines reported in the last few days.

When you look at the actual business of running newspapers, however, it is notable that the average operating profit among the six publishers is 18.5%, as measured by earnings before interest, taxes, depreciation and amortization (EBITDA). For all that ails the industry, this surpasses the EBITDA of such companies as Chevron (18.7%), Boeing (11.2%), Wal-Mart (7.7%) and Amazon.Com (6.0%).

If publishers, their shareholders and lenders were wiling to accept significantly lower levels of profitability in the future, then further cuts would not be necessary in staff, newshole, circulation and certain other variable expenses. If this were not the case, which it likely will not be, then more cuts would seem to be on the way.

Here is a summary of the results:

14 Comments:

Anonymous Anonymous said...

You have hit the kernel of the nut here, once again. And it points to why newspapers have to forget about public ownership and find some family to adopt them. I don't know how you put this genie back in the bottle, but the value of family ownership was that it stood firm during down periods because they knew newspapers are an unbelievable license to print money in good times. Wall Street only looks to the next quarter, and only do straight-line analysis based on current trends. This is why the stocks are in the crapper, and are going to stay there until the economy recovers (mid-2009?).
One option for savings that I see you don't discuss is a radical thinning out of middle-management, which is what I am expecting to see next. Having already cut circulation zones, reduced the size of the newspaper, and thinned out newsroom ranks, the bloated ranks of managers with their six-figure salaries and benefits now stand out like sore thumbs.

8:27 AM  
Blogger Kent said...

All this sounds eerily like the song "Gravity is Gone" by the great band Drive By Truckers, the main chorus of which is this:

"What used to be is gone, and what ought to be ought not to be so hard.
So I'll meet you at the bottom if there really is one.
They always told me when you hit it you'll know it.
But I've been falling so long it's like gravity's gone and I'm just floating."

Signed,
A reporter at What Used to be a Major Metro

8:48 AM  
Anonymous Anonymous said...

What happened to ad spending on the Olympics? Earlier this year, newspapers were predicting the Olympics and the presidential elections would be positive factors for ad spending. But read what the execs said on their conference calls, and you see they are saying ads dropped off suddenly in June and that drop off continued into July. July is when contracts should have come in for August Olympics ad spending and back-to-school (Aug. 26 here). So if that doesn't look good, expect an even more miserable third quarter result in September.

9:17 AM  
Blogger SBV, CEO said...

There's always been this obsession inside the companies with revenue as the metric that matters. Not profits, revenue. When times are good nearly each incremental dollar of revenue is more or less equivalent to profits, so the error is kind of forgivable. However, it cuts the other way when times are bad and clearly that's what's happening now

Even worse, we're looking at EBITDA, and alot of these companies have a very big expense in the "I": interest.

6:30 PM  
Anonymous Anonymous said...

Alan: Time to dust off the old Default-O-Matic, as rating companies adjusting debt ratings downward in light of 2nd quarter results. Fitch just dropped MNI three points.

7:35 PM  
Anonymous Anonymous said...

I enjoy your analyses of the newspaper industry. Please continue. I'd like to know your thoughts about niche publications, such as weekly business newspapers.
Thank you.
Mike

8:42 AM  
Anonymous Anonymous said...

Wow, if it were so simple ... lower the margin expectations (take the hit from the Street) and avoid cuts to the product, staff and service.
Unfortunately, many papers and some companies are already under water and 18%(Gannett), or 10%(NYTCo), or 5% margins will soon be a thing of the past for all newspaper companies. Newspapers don't have a sustainable biz model ... too much gas, paper and staffing (reporters/sales) that cant' be outsourced to India.
Look for another answer.

9:28 AM  
Anonymous trotsky said...

Private ownership isn't all that -- or Copley wouldn't be looking to sell the Union-Tribune.

(Side question: Don't these geniuses in the head office know you should sell when the market is up?)

12:41 PM  
Blogger Sivaram Velauthapillai said...

The market will price in lower profit margins in the future. It is already well on its way. Even if you project lower (but not necessarily horrible) earnings in the future, a lot of these companies are trading at low valuations on a P/E basis.

I am pretty sure that anyone that buys a share in these companies is using some lower profit margin for the future. I doubt too many are investing with the expectation that past earnings margins will return.

However, none of that means that the companies won't shut down operations, streamline costs, or lay off people. Even if the market places a lower expecation for the future, as long sales keep declining, things will keep getting worse.

Like other businesses, one of the big risks for newspapers is that their capital structure (essentially their debt usage) is structured for the higher margin business of the past. Given that profitability will be weaker in the future, these companies need to restructure and get rid of their seemingly high debt levels. I think if they can lower their debt while keeping revenue flat then they will be fine...

8:14 AM  
Blogger William Doolittle said...

You are right. Still newspaper owners are demanding obscene profit margins, and have been since cumputerization and the destruction of the backshop. Had the owners, private and public, been willing to take, say, 10 percent, all these years, they would have the resources now to at least fight the new challenges. Instead they are blaming everyone but themselves. They will ride their horses to the ground rather than change their cash flow demands. The only cuts they have not made is in their own salaries. That tells us where their true priorities are.

6:05 AM  
Anonymous Anonymous said...

What bothers me most about this depression scenario is that newspaper execs don't seem to be learning from their monumental mistakes. There seems to be acute awareness that the Web is the future of newspapers, but look at newspaper Web sites and you see a monumental lack of innovation. They are clunky to use, they bury interesting stories, and a few even prohibit comments from the great unwashed. Others look like they have grabbed Utube, Twitter, Facebook and other technologies and just thrown them on their sites in vain hope that will show they are with the trend. It's all truly pitiful.

9:38 AM  
Anonymous Anonymous said...

Answering some other postings and comments, it looks like we are now hearing how miserable things are with newspapers held in private hands. Advance is closing Newhouse News Service and threatening to sell off the Trenton and Newark papers unless the unions agree to deep cuts, and Copley is selling off its flagship San Diego h.q. So it looks like private ownership is not a panacea for industry ailments.
Paradoxically, government statistics show the economy in the 2nd quarter didn't fare that badly, and certainly didn't come near the recession everyone said was here. If this is what moderately good times look like, what would the newspaper industry look like if the economy was truly in the crapper?

9:59 AM  
Anonymous Anonymous said...

Alan, don't miss a great story in the Wall Street Journal:
http://online.wsj.com/article/SB121746776033899393.html?mod=2_1571_leftbox
which IMO explains some trends you have been describing here for recent years. You don't normally follow Yellow Pages publisher RH Donnelly, but take a look at their stock recently (RHD) and you will see more carnage as advertisers have bailed out from Yellow Pages. Now, according to the WSJ article, local newspaper ads are also swooning largely, it seems, because of internal newspaper issues and problems. It is as if newspapers are deliberately committing slow suicide. They are all moving to local, local in coverage, but no one told the ad department.

7:01 PM  
Anonymous Anonymous said...

At this writing Journal Register stock is a penny. Lee is merging some Idaho papers. NYTimes has a story on the absence of newspaper company buyers: "Newspapers Could Be Bargains, but Few Are Buying." Posts here today suggest that the private companies are not faring much better or are trying to get while the getting is less bad.

Given the falling valuations, deep cuts, lack of buyers, continued competitive and economic pressure, do you think we'll start seeing newspaper closures anytime soon?

Most of the attention on this site is about big papers and media companies. But what of the hundreds of regional and community papers -- particularly those owned by big, failing media companies?

Do you envision small community dailies and weeklies being sold to local buyers or local groups? Cutting frequency where possible and doing more online?

Will we see more small neighboring papers merged?

If you're an exec at GateHouse or Journal Register what can you possibly do now? Part everything out and sell off the real estate?
The banks will only be patient so long.

What do folks here think? What's next?

3:08 PM  

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