McClatchy_logoMcClatchy reported a first quarter net operating loss of $11.3 million and more deep declines in print advertising today as its stock continues to takes a pummeling.

McClatchy shares have been trading between $1.50 and $1.60 the last several days. That is about half where they were at the start of 2015, and they have lost roughly three-quarters since this time a year ago.

Wall Street values the company at a market capitalization of $135 million,  That's less than $5 million per paper in a collection of 29 titles in 28 cities including the Miami Herald, Kansas City Star and Charlotte Observer. (See clarification below.)

Continuing the trend of recent earning reports, print advertising was the problem spot, down 15.7 percent year-to-year with national advertising especially bad, off 25 percent. All other revenue sources were up about 1 percent, CEO Pat Talamantes said, and those now account for two-thirds of the company's revenue. Digital ad revenue was up more than 5 percent and digital-only ad revenue up 15 percent

Talamantes said that Miami and other larger markets were by far the hardest hit.  At mid-sized and smaller papers, the ad base has historically been more local, so they are doing reasonably well.

Given the circumstances, Talamantes spent little time during a conference call with analysts on numbers and instead chose to talk at length about the company's turnaround strategy. That includes:

    • Various sales initiatives including getting the force "better trained and organized" with oversight from new senior executives.  "That will take some time," Talamantes said, and results may be bumpy, especially in the second quarter.
    • Similar changes are coming in news, Talamantes continued, emphasizing digital, "What readers want," he said "in digital and even in print is not the same as it was a few years ago." (Poynter has a substantial training contract with McClatchy to help accelerate the news-side digital transformation).  Talamantes added that plans do not include any reduction in print frequency such as what the similar-sized Advance chain has done in New Orleans and most of its markets.
    • The company will continue a year-long initiative to expand its video offerings -- which typically command higher rates for advertising than do digital text presentations.
    • On the cost side, the company expects to save $25 to $30 million over the course of this year in production and distribution.  Individual papers are prepared to make further expense reductions, Talamantes said, if results don't improve, at least a little, in the second half of 2015.

"The pace of digital transformation in our industry is unrelenting," Talamantes summarized, and McClatchy would be courting worse trouble later if it didn't invest in the package of changes now.

McClatchy sold its stake in two growing and profitable digital classified services in 2014 and applied the proceeds to paying down the huge debt it took on when it acquired Knight-Ridder nine years ago.

But even with debt reduced to about $1 billion, the company paid $22 million in interest for the quarter. That was about 8 percent of total revenues of $258 million and effectively wipes away earnings from the papers and their digital operations -- nearly all run at a comfortable profit margin.

Though it gets much less media attention than the New York Times Co., McClatchy shares a two-tier stock structure in which family members have the controlling vote.  To date, they have shown no interest in selling the company, shedding its debt in a bankruptcy reorganization or shuffling management.

That could change, but my read is that investors think that McClatchy will stick to the transformation plan Talamantes outlined  with little regard for short-term profits. So the investment community is sitting on the sidelines waiting to see whether those initiatives work -- Hence the low and deteriorating share price.

The tone of the analysts' questions was cordial. The toughest came at the end of the call when Talamantes was asked whether he could make more rounds of cuts without damaging the company and making the revenue challenge even worse.

"That's what we get paid to do," Talamantes replied.  He had earlier described McClatchy as a "journalistically accomplished, digital-forward company."  As for the legacy side of the business, he said, "Print advertising is just a piece we ride out. Some years (the losses are) more, some years less."

Clarification:  McClatchy's 135 million market capitalization does not mean a typical one of its 29 papers could be bought for $5 million.  A buyer of the whole company would also have to assume the $1 billion in debt, and, if the company chose to sell individual papers, there would likely be a premium to the stock value.