The Way Wall Street Sees It: "Even The Most Diligent" Cost-Cutting By Newspaper s Cannot Make Up Revenues Losses – Goldman Sachs After Reviewing Gannett’s Dismal May Numbers

Philip M. Stone June 21, 2007

As newspaper groups continue to report how their Internet revenue increases are just swell but, well, let’s not talk about print, Goldman Sachs weighs in with the view that no matter how good that Internet revenue, no matter how big the print cost-cutting, those print losses continue to outstrip all the bandages.

Even mighty Gannett, the largest newspaper group in the US, suffered a 7% decline in overall revenue in May compared to a year ago. Its only good news was that because of British Pound currency fluctuations combined with a better performance at the UK’s Newsquest Newspapers that 7% decline drops to 6%.

But just looking at its US advertising categories and the dim picture becomes very clear – local advertising down 6.3%, classifieds down 8%, real estate down 9%, employment 9.6% and automotive down 13%. National ads were down 5.4%

ftm keeps a special eye on USA Today because  we suggested  last December  that in this type of economic climate imposing a 6% increase in 2007 ad rates as the newspaper did was not going to do it any good. May ad revenue was down 7.8% on 55 less ad pages.

Another group, Lee Enterprises, boasted that its May online advertising revenue jumped 60.2% over last May, but when that revenue is combined with losses on the print side guess what the overall picture is – right, a 1.7% revenue decline.

Print retail advertising declined 4%, classifieds were down 5.6% and within that employment sank 12.4%, automotive fell 10.5%, and real estate dipped 9.9%.

Lee owns 51 daily newspapers and more than 300 weekly newspapers, and having operations in 23 states it can serve as a pretty good barometer for what is happening across the country. Its basic message is that print is getting worse while Internet is getting better, but “worse” still beats “better”.

McClatchy also added to the mid-year gloom, noting that advertising revenues dropped 11.5% on the back of a 10.4% drop in advertising revenues. And CEO Gary Pruitt says June will also be bad, but perhaps not as bad as May. As for the rest of 2007,  “business trends remain unclear”.

Pruitt emphasized that the group’s major strategy is to maintain operating cash flow as high as possible and since the revenues are down that means the cost cutting continues with a vengeance. “We will remain focused on reducing operating expenses and mitigating the impact of the advertising trends on our cash flow,” he said.

And he pointed out the cost-cutting has been to good effect. “Our cash expenses through May were down 7.7% on a pro forma basis (to last May). Through the first five months our operating cash flow is down only 1.1% and our EBITDA margin has grown to 24.3% from 23.1%.

And, like other presenters at the mid-year newspaper review in New York, he emphasized that online was doing well – it now accounts for 8.6% of the company’s total revenues and he hoped it would equal 10% by the end of the year (but is that from online doing even better or print doing even worse or some combination of the two?)  Newspaper circulation is expected to drop 3-4% through early 2008 and declines will moderate after that to around 2%.

The theme of Janet Robinson’s presentation for the New York Times Company was basically, “If you’ve got it, flaunt it.” Robinson, chief operating officer, said that the Times had a very loyal readership – 90% of its home subscribers have been so for at least two years – so the way to reward that loyalty is to charge them more! Come July the Times will raise its home delivery and newsstand cost – a move Robinson says will bring in an extra $7-$8 million this year and on a full year basis bring in some $14-$16 million.

The plan is to raise home delivery rates slightly – some 3-4% -- but in an effort to increase home delivery the newsstand price will go up 25%, from $1 to $1.25. The Sunday newsstand price will increase from $3.50 to $4.

That seems to be the trend now for those newspapers that believe they have unique content. Last week Dow Jones announced it was hiking the newsstand price of the Wall Street Journal in July by 50% to $1.50, and in the UK the Financial Times has raised its price. 

If metropolitan newspapers can get their local coverage act together so that its readership thinks the content is unique then it may be a way forward for them, too. On the other hand if those metropolitan newspapers continue to cut back local reporters then it’s going to be a hard sale to convince readers to pay more for less.

Loyalty, of course is a fickle thing. The UK’s Sunday Times thought it had a loyal readership so in February, 2006 it raised the newsstand price and there was nary a word of complaint. So it figured it would go to the well again in September, but this time the readers did vote with their pocket books, circulation dropping around 100,000. Even in New York in May, the New York Post figured it could double its newsstand price from 25 cents to 50 cents with few problems.  Readers again voted with their pocketbooks and down went the price again.

But the Times figures it has a high quality product that loyal readers will pay more for and while there will be some circulation losses the accountants have forecast that weill be offset buy big additional circulation revenues. And Robinson, like those who spoke before her, emphasized it was all-important to maintain print’s cash flow. She said online operations now accounted for about 10% of the Times’ total revenues and while the forecast 30% online growth for this year probably won’t materialize she said it is holding steady at around 22%.

But for all that the Times Company saw May advertising figures drop 8.5% with total revenues down 5.8%, so instead of relying just on cost cutting to maintain the cash flow maybe a price hike may be just what the doctor ordered – if those loyal readers will let them get away with it.

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