First quarter reports show new year brings new earnings slump for newspapers

If 2011 is to be a turnaround year financially for newspapers, business needs to pick up briskly. Returns from the first earnings reports for the first quarter are familiar and distressing -- lower revenues driving lower earnings compared to the period a year ago.

Reports last week from Gannett, New York Times Co. and Media General surfaced some new problems along with the familiar ones:

  • Telecom advertising -- except in the large national papers -- took a deep dive for the quarter. AT & T is awaiting regulatory approval for its surprise acquisition of T-Mobile. For the industry, consolidation has now thinned the herd of competitors, and a lucrative advertising arms race (remember Chad and the four nerds?) is winding down, too.
  • Digital hiccups come with the effort to diversify revenues. For the first time in memory, the New York Times Co.'s, though still highly profitable, reported a year-to-year revenue loss (roughly 10 percent). Media General suffered a significant misadventure with its subsidiary. The shopping site had been reliant on Google search for much of its traffic, which fell 46 percent year-to-year after Google revised its algorithm.
  • Odds and ends drove ad declines. Gannett cited severe weather in many of its 81 markets. The New York Times said the unsettled world economy had its advertisers pulling back in March and so far in April. A late Easter was another first quarter negative, though that business will roll over to this quarter.

Besides those new problems, others persist, including several I cited last fall to explain disappointing 2010 results.

  • Newsprint prices continue high. Even cutting usage, all three companies reported a 10 percent-plus increase year-to-year in paper costs. That may ease in the latter half of the year, but rising gasoline prices are making it more expensive to deliver print editions.
  • Circulation revenues are down some as companies are reluctant to try additional price increases and paid print circulation falls. It is unclear whether companies are making greater use of discounted subscriptions as allowed in the new rules of the Audit Bureau of Circulation.
  • While auto revenues have bounced back (a nice boost to Gannett and Media General television stations), jobs and real estate advertising remain weak. That is especially true in problem markets like Florida and California.
  • Digital ad revenues continue to grow at a healthy clip, but with a smaller base, they do not make up for continued losses in print.

Both Gannett and The New York Times reported healthy cash reserves and an easing debt burden. But for other companies -- like McClatchy, which reported today -- paying down a big debt, some of it at a double-digit interest rate remains a significant challenge.

Lee Enterprises, still digesting its expensive purchase of Pulitzer in 2005, announced earlier this month it would refinance its debt with junk bonds, thus averting probable bankruptcy next year.

Media General continues to put more than 10 percent of revenues into interest and paying down debt. Executives said in last week's earnings conference call with analysts that after earning virtually nothing in the first quarter they still think that the company can show a $100 million profit over the balance of the year.

Noting that television stations will not benefit from the political advertising boom in the second half of 2010, veteran analyst Ed Atorino was skeptical.  "Can you give us guidance on how you are going to get there?" he asked.  "That's a big number... You'll need a hell of a second half."

The very thin profit margins on net earnings (1 percent for the quarter at New York Times Co.) do not delight Wall Street, but I see a positive beneath the surface. As all the companies do their own version of digital transformation, they are investing in new media rather than harvesting operating profits and dropping them to the bottom line.


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