Advertsing Forecasts For 2008 Already Lowered As The Common Thread In Q4 Newspaper Results, Besides Terrible Numbers, Is 'Softening'

Philip M. Stone February 1, 2008

Results announced by many newspaper companies Thursday confirmed worst fears that December was just plain awful – so much for Christmas – and the overwhelming outlook for this year is 'weak'. And already financial analysts are lowering their 2008 advertising revenue forecasts with the 'R' word looming ever more.

About the most positive spin we could find came from Belo chairman and chief executive Robert W. Decherd who told New York analysts, “2008 isn’t going to be a pretty year for any newspaper company.” But “while the industry is presently undergoing profound and fundamental changes, there will always be demand for high-quality, in-depth local news and information that our newspapers provide.”

Meanwhile, headlines were blaring out, “New York Times Posts Lower Profit, Revenue Falls 7%”, and “”Poor Ad Sales Sink Scripps 4Q Profit”…there were many more in the same vein but you get the general idea.

And the depth of the downside is really startling. Take the New York Times Company that divides its newspaper holdings into three distinct groupings. For the New York Times Media group that holds the namesake national newspaper, Q4 advertising revenues were down 13.3%. In the New England group, headed by the Boston Globe, the Q4 advertising revenues were down 17.7%, and for the Regional Media Group of smaller newspapers the advertising revenues were down 11.3%. So no matter if big or small, national or local, it was double digit advertising revenue percentage decreases from the same period the year before (taking into account that 2006 had one extra week of reporting).

At E.W. Scripps, newspaper advertising revenue for Q4 was down 12%, hit particularly by lower classified sales, at Belo newspaper revenue was down in the same period by 11.5%, and at Media General the fall was 11%. When Gannett reports today expect more of the same.

But if those numbers by themselves weren’t bad enough it is their forecasts that really worry because there ‘s no one out there brave enough to say there is any light at the end of the tunnel, nothing to show that things will get better any time soon. So prepare for even worse numbers to come. At the New York Times, for instance, Janet Robinson, CEO, said that October and November had shown good revenue improvement, but that December really softened, and January looks like it will decline in the same percentage terms as in December. “There are signs of a softening economy of our business, “she understated.

And although the Times is a company where Internet revenues are significant and have double digit percentage increases each quarter, the company says those increases are still not enough to offset the loss of print advertising, and that will be true for just about everyone else, too.

Meanwhile the financial analysts have had a chance to digest those Q4 numbers and January forecasts and have decided they don’t like them. At Wachovia, which had already been pretty pessimistic forecasting a 6.1% newspaper advertising revenue drop for 2008, that figure has now been dropped to 8.2%. And the commentary that went with that forecast change  was not hopeful.

“The year has started below our expectations,” said analyst John Janedis, “We’ve seen this scenario before, and trends typically haven’t improved. In fact we think the deterioration of newspaper fundamentals is broadening and deepening.”

And he also lowered the forecast for Internet revenue growth, down to 13% from the previously forecast 15%, and his outlook for print classifieds was equally bleak. “Broadly, we think at least one-third of classified revenues are at risk of migrating online over time.”

But one shouldn’t lose sight that much of this bad news is about major metropolitan and national newspapers. Lower down the scale the situation is different.  “The Sky Is Not Falling  … M&A Markets Still Healthy,” cries out  a headline in a newsletter from newspaper broker WB Grimes & Company that says there is still considerable interest in smaller daily and weekly newspapers. “Multiples for weekly newspapers that command strong market positions remain solidly at 7 to 10 times cash flow (EBIDTA) and between 1 – 1.5 revenues. There are many group operators in the market right now seeking to make strategic, all cash acquisitions.”

As for daily newspapers, “Although we have seen multiples fall as low as 8 times  cash flow, the lower valued deals have been the direct result of poorly run auctions or very antsy sellers eager to sell quickly to either satisfy restless shareholders or buy down debt. In these instances the pieces were worth more than the whole, and should have been sold off that way. We believe a daily, in a strong market position, backed by a solid online initiative, will still command a purchase price between 10 – 11 times cash flow.”

The problem, the newsletter notes, is on the lending side.  “Most banks have dramatically tightened their lending requirements. Buyers need to figure 20% down as a minimum with a bank lending on existing cash flow (no futures or projections). There must be enough existing cash flow after a sale to cover debt service from day one.” Even with recent Fed interest moves the down payment requirements will probably stay in place for some time to come.

The “R” word that everyone fears is, of course, recession, and informal polls of the top business executives from around the world who attended the World Economic Forum in Davos seemed to indicate we are basically in one now, or so close to one it doesn’t make much difference whether technically it is or it isn’t. The Wachovia media analyst, John Janedis, suggests that that a “newspaper ad recession” is already upon us and he lowered his ratings on the New York Times Company, Journal-Register and McClatchy.

And the sad problem is, there really isn’t anything out there to indicate he’s wrong.