The Biz Blog

If I were CEO of Gannett (a highly unlikely scenario), I would likely aim for lower profits and more investment in substantive news for both my print newspapers and their digital enterprises.

 

That said, it's bogus to juxtapose some leaked profit margins at Gannett papers for the first three quarters of 2007 -- ranging as high as 42 percent -- with this week's layoffs of an estimated 1,000 newspaper employees.

 

Suppose you have been running your business at a 20 percent operating margin. This year revenues have declined 17 percent, but with cuts, including shrinking staff, you continue to operate at a 20 percent margin. So what has happened to profits? They are down 17 percent. And that's not good. 

 

Gannett's actual results and those of the industry are worse than our hypothetical company because margins are falling, too. Despite slashing news space and staff to levels that risk turning some papers into unappealing, empty shells, the cost cuts do not match the revenue declines.  

 

Here is how it played out at Gannett in the third quarter of 2008 [PDF]. Publishing advertising revenues, including those from USA Today and the company's British newspapers, were down 17.6 percent compared to a year ago. That is slightly better than the industry average of 18.1 percent for that quarter as estimated this week by the Newspaper Association of America. 

 

The publishing division's operating cash flow margin fell from 24.2 percent in 2007 to 17 percent this year. Put that together with the revenue decline, and actual cash flow fell by more than $150 million, just under 40 percent.

Returning to our hypothetical company, suppose it earned $100 million last year, will earn $60 million this year, and may earn $40 million or $50 million next year. Do you know any investors who want a piece of that action? That's why newspaper stocks are trading at the historic lows I noted earlier this week.

 

Of course, 2009 revenues are virtually certain to be worse as both the recession and the loss of print classifieds to electronic competition continue. Fourth quarter staff cuts at Gannett and other companies reflect a calculation of what the industry can afford next year. Those cuts are too late to have much impact in 2008.

A comparison to 2007 margins is even less relevant -- a form of nostalgia for good old days, admittedly not so long ago, that are gone. When you're running a business, it doesn't much matter what you did in the past; it's all about the future.

Should Gannett have banked more in 2007 and prior years? Well, successful businesses, unlike successful individuals, generally don't save the money they earn.

Here's what Gannett did with all that cash while the money was flowing in fast: They paid dividends to investors, now about $90 million a quarter. Comparatively little -- $122 million -- has been built up in cash reserves. Most of the rest has gone to acquisitions or startups. In the 1980s and 1990s, those were newspapers and television stations. This decade, the investments are all in digital ventures, ranging from the CareerBuilder electronic job board to Captivate, a platform for serving advertising in elevators and other public places.

Such diversification into businesses with growing revenues makes a company stronger when its core businesses are suffering.