Tuesday, March 09, 2010

Publisher profits dive 1.7x faster than sales

While sales have fallen an average of 27.4% at newspaper companies in the last two years, profits have plunged 1.7 times faster, according to an analysis of the financial statements of the publicly held publishers.

The average 45.9% dive in profitability at the publicly traded newspaper companies since 2007 represents not only serious financial challenges for the companies but also threatens the quality of the journalism that such major publishers as Gannett, McClatchy and the New York Times Co. may be able to produce in the future.

News staffs and news holes already have undergone significant contraction as publishers sought to preserve profits since advertising sales began shrinking in 2006. But the sharp decline in newspaper profitability in the last two years means that those cuts – and all the other economies undertaken by desperate publishers – have not come remotely close to preserving the industry’s historically high profitability.

Unless ad sales begin to rebound vigorously and soon, publishers will have to become increasingly aggressive about cutting expenses to preserve whatever profits they can. Because editorial staffing and news hole are among the easiest expenses to cut, they are likely to come in for a disproportionate amount of unwanted attention.

Ad sales, which represent some 80% of the revenue stream at a typical newspaper (circulation revenues make up the rest), have been sliding steadily since hitting an all-time high of $49.4 billion in 2005. Sales fell fractionally in 2006, 7.9% in 2007, 16.6% in 2008 and probably 25% or more in 2009 (final numbers are pending), according to the Newspaper Association of America.

Though publishers reported that sales in the fourth quarter of 2009 fell by “only” about 20% after tumbling as much as 30% in prior quarters in the year, most publishers said sales in the first part of 2o10 were continuing to decline by double digits.

To put it mildly, the industry is far from being on the road to recovery. But that doesn’t relieve publishers from the expectations of investors and lenders, who are counting on them to deliver something close to the rich profits that newspapers dependably generated in the past.

Lenders, in particular, are relying on newspapers to make enough money to cover future interest and principal payments on debt that at least some analysts believe is unsustainably high. Although several publishers have renegotiated their debt to get more lenient terms than were in place a few years back, most of the agreements anticipate that newspaper sales and profits will stabilize – if not increase.

Despite the traumatic cost cutting that has savaged the newspaper business since 2007, an analysis of the financial performance of eight publicly traded companies shows that they fell far short in 2009 of delivering the EBITDA they produced as recently as 2007.

EBITDA, which stands for earnings before interest, taxes, depreciation and amortization, is commonly used to measure the profitability of a company without regard to such extraordinary events as severance payments, plant shutdowns or losses occasioned by declines in the value of their assets. Several publishers in recent years have been forced by accounting rules to reduce the book value of acquisitions that, in retrospect, were vastly overpriced. Because EBITDA looks only at how much money a company makes after it subtracts operating expenses from the revenues it brings in, it is a way of gauging the ongoing health of a business.

As detailed in the chart below, not a single one of the eight surveyed publishers has been able to hold the line on its profitability in the last two years.

The companies included in the analysis are such pure-play newspaper publishers as A.H. Belo (AHC), Lee Enterprises (LEE) and McClatchy (MNI). The companies combining newspapers with broadcasting are Gannett (GCI), Journal Communications (JRN), Media General (MEG) and E.W. Scripps (SSP). The New York Times Co. (NYT), owns About.Com, a major online subsidiary.

GateHouse Media was not included in the analysis, because its sales grew through acquisition in the last two years. Its revenues rose 1% between 2007 and 2009, while EBITDA fell 24.4%. News Corp. and the Washington Post Co. were not included in the survey, because U.S. newspaper operations represent no more than a third of the business of each company.News Corp. is more broadcster than publisher and WaPo is an test-preparation company.

While tumbling profitability represents a serious danger to the financial and journalistic health of newspaper companies, it is important to note that the industry’s average 15% EBITDA in 2009 puts it on a par with Exxon and Chevron. Newspapers are twice as profitable as Wal-Mart and three times more profitable than the Ford Motor Co.

Unfortunately for newspapers, their reduced profitability falls short of their historic performance – and the expectations of the financial community to whom they must answer.


Anonymous Anonymous said...

Thank you. You have explained why layoffs and cutbacks continue, even as the stock prices of newspaper companies rise. I have been wondering how long it would take someone to wake up and realize something is terribly wrong here.
I also agree with you that editorial is going to take another big hit. The chains are experimenting with centralizing copy editing (disaster), and consolidating printing plants. Some are even eliminating top managing positions by doing away with managing editors and consolidating publishers. But I don't believe there is much savings left.

8:32 AM  
Anonymous Anonymous said...

What's a surprise is not the plunge in profits, but how both publishers and Wall St. can still expect the industry to be the cash machine that it once was. Resources on both the B2C and B2B sides have been cut to levels that would not sustain existing lines of business, and operations have been trimmed back to correspondingly reduced levels. Further expense cuts to feed the profit mill are going to result in further declines in business.

It's a losing strategy, and especially foolish at a time when the industry needs more investment just to stay competitive in an evolving market.

9:37 AM  
Anonymous John Reinan said...

No doubt the debt incurred in fat times is a huge problem for many of these companies. But as you point out, several have been able to renegotiate debt -- but renegotiation still doesn't look like their savior.

I guess the question is when Wall Street will finally realign its long-term profitability expectations for the newspaper industry.

You'd think the big-money boys would eventually have to permanently lower their profit targets for this industry. If newspapers continue to chase 20-30% profit margins to satisfy Wall Street, it will only hasten their demise.

But I suppose Wall Street doesn't care -- they'd rather milk another 10 years of high profits, then walk away from the burning wreckage and move on to something else. Under their business models, that probably beats 30 years of 7% returns.

12:48 PM  
Anonymous bernard zimmermann said...

Large cuts in the reporting staff have already been done. It shows too. You can see now that many newspapers are not as good as they used to be.

I doubt this can continue at the same rate.

The basic problem is most of the costs of a newspaper are fixed.

The formula is
Profit = k x (Sales) - (Fixed costs)

This is why often even a minor drop in sales results in a major loss in profits.

However, newspapers can still run at the current level, they have awhile to go before they hit ford's level.

5:38 PM  
Blogger Unknown said...

Alan, did you do the analysis and can you please post the data and sources? Thanks.

6:14 PM  

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