Trouble on the Top Line
Something odd happened last week at a two-day conference where public newspaper companies made their pitch to analysts and investors. Short-term profits, the alleged preoccupation of the Wall Street set, rated only passing mention. Instead, the executives focused on the argument that their companies have sound growth strategies and a viable future.
To be specific, Knight Ridder and Dow Jones got through their presentations without ever mentioning earnings per share (EPS), the coin of the realm for quarter-to-quarter performance comparisons. Gannett is usually the leader of the pack in profitability. But CEO Doug McCorkindale, in his final appearance before retirement next month, said only that he expected the second quarter to be about like the first. (That was a 5 percent increase in EPS compared to the same period a year ago).
Going tight-lipped on the present left plenty of time to expound on the future, where six of the companies have splurged on Internet acquisitions during the first months of the year. References to the industry's battered stock prices were mostly oblique but there was plenty of spin on how falling circulation numbers and the flight of young readers to the Internet are not as bad as they look.
The radical shift in emphasis in what is being talked about with analysts is probably two stories in one.
Less than halfway through 2005, this year is shaping up to yield results the industry would rather forget. Advertising growth is patchy with soft performance in national and automotive dragging down other healthy categories such as employment and real estate classified and local retail. Those companies with large broadcasting divisions (Gannett, Tribune, Belo, Media General) are recording bad comparisons, likely to get worse, against 2004 with its robust political and Olympics advertising.
Newsprint prices, falling during the worst years of the ad recession in 2001 and 2002, are increasing by about 10 percent this year. (Analyst Paul Ginocchio, of Deutsche Bank Securities, reports a wave of current orders for lightweight paper. So watch for yet another shave in thickness in the second half of 2005).
As recently as last year, the public companies' EPS growth was 8 percent on a 4 percent increase in revenues. That can be achieved by tight control of expenses and buying back shares of stock (thus spreading the earnings over a smaller number of shares). Even with those moves companies will be hard-pressed to grow EPS any faster than revenues. Some are posting declines to date.
If 2006 should turn brighter for earnings, maybe the usual emphasis on the bottom line will be back in style. On the other hand, the questions from analysts and investors also seemed focused on issues of long-term revenue growth rather than margins.
"You've always been brutally frank," said an analyst prefacing a question to McClatchy CEO Gary Pruitt. If ad revenues rise 5 percent a year, and circulation revenues are flat for five to 10 years, he continued, where's the increase in shareholder value?
"I'm sorry we're out of time," Pruitt joked. But as in his prepared remarks, Pruitt defended newspapers' superior reach over other media in their local markets. (Industry-wide, more people read a daily paper than watched the last Super Bowl). And the companies have some smaller advantages, too, versus the market at large, he said, including fully funded pension funds.
On circulation woes, the companies offered a variety of mitigating explanations for the drop of nearly 2 percent daily reported in the six-month period ending March 31. Readership is the more important metric, said Scott Smith, president of Tribune Publishing, and it hasn't fallen nearly as fast. Also, the Newspaper Association of America and individual companies like Gannett are pushing a combined measurement of traditional newspaper and online readership, a metric that shows audience growing rather than plummeting.
Several of the presentations quoted an NAA study that readership (as opposed to paid circulation) among 18-24-year-olds, while diminished, is still pretty robust -– 39 percent daily, 46 percent Sunday and 68 percent at some point during the week. "And when they are reading a newspaper," Knight-Ridder CEO Tony Ridder added, "they are focused, not multi-tasking as with electronic media."
So far, advertising has not tracked the steep declines in circulation, but the question remains whether a newspaper can raise advertising rates while circulation is falling. Revenue growth softening to 2 to 3 percent would send even more investors scrambling for the exits.
Newsroom cuts, together with trims in paper width, weight and newshole also seem likely to hasten circulation decline, creating what Philip Meyer of the University of North Carolina has called a "death spiral." As usual at these twice-a-year meetings, only the usual suspects -- McClatchy and Dow Jones -– emphasized reinvestment in the main newspaper report. McClatchy, not coincidentally, has outperformed the rest of the industry in circulation and recorded revenue growth among the best for the last five years. Dow Jones, with its base of technology and financial advertising badly ailing, is charging ahead this September with the expensive launch of a Saturday Weekend Edition of The Wall Street Journal.
The trend in 2005, though, is to investments in freestanding Internet companies. The roster of acquisitions includes:
- Shopzilla (Scripps), a comparison shopping service
- Topix.net (Gannett, Tribune and Knight Ridder as a consortium), a locally oriented search service for both news content and ads
- PointRoll (Gannett), a producer of "rich media" advertising
- About.com (New York Times), a big consumer-interest site organized by 500 special interest categories
To put it mildly, these all are big departures from traditional newspaper journalism. At About.com, for instance, the editorial content is provided by freelance "guides" whose compensation depends on the number of visits to their section of the site.
Depending on your viewpoint, the acquisitions boom can be taken as a positive demonstration that the industry is not standing pat as it doubles e-media bets already in place on fast-growing newspaper online operations. Or you might worry that the companies are wandering afield of their core competency, not to mention their First Amendment and public service roles.
An expression of skepticism about the rush to non-traditional products came up, surprisingly, in a panel the NAA had organized to tout the effectiveness of newspaper advertising. Panelists included Marsha Lewis, a strategist at Best Buy, which places preprint advertising in most large Sunday newspapers 52 weeks a year, and Jeff Piper, who guides newspaper advertising buys for various clients of Carat Press.
The "expanded footprint" that newspapers are seeking with investments in youth, Hispanic and other niche publications, as well as online, is fine up to a point, Piper said. "The problem is that they take the reader out of the newspaper." The strategy could prove a mistake if companies "are not improving the quality of the paper itself."
Big-ticket ad buyers, Lewis added, are still organized medium-by-medium rather than across platforms and usually have little interest in the small niche buys. "So, yes, it’s a land mine."
Put the industry down, however, as feeling the necessity to venture out to new territory -- land mines or not. Most seem to be turning a corner to the recognition that business as usual will not cut it going forward.
Analysts in the break room grumbled about the sketchiness of some of the presentations. Those looking for fresh numbers to plug into their earning projection models came away disappointed.
You could say, though, that the CEOs fought industry pessimists to an honorable draw. Newspaper stock prices, already down 15 percent for the year, did not move dramatically after last week's sessions. In fact, they modestly outperformed the S & P 500 for the week.