Nine Questions on Newspapers' 2Q Reports

So what do we make of the first half of 2008 in DailyLand? Bad and getting worse. I've listened to the CEO webcasts -- so you don't have to! -- and must say that there were a couple of eerie echoes of my own suggested remarks, offered a couple of weeks ago ("Candidly, Frankly, Truthfully, Newspaper CEOs Talk About 2Q). CEOs would be the first to acknowledge that the times offer more questions than answers. Here's my first Nine, off recent reports: 

1. Where are the unprofitable properties? In June, Dean Singleton told the World Association of Newspapers that 19 of the top 50 US dailies were unprofitable. We didn't hear a whisper of unprofitability in the comments. Of course, only the public companies reported, which leaves a number of the top 50 unpublicized. Think MediaNews, Advance, Copley, Hearst. We knew that the San Francisco Chronicle was first to make the list, losing a million or so a week for about five years now. Who are the other 18?
2. Does McClatchy's announcement that it has almost reached the point that 50% of online revenues are online-only provide a new foundation of hope? Newspaper companies' reliance on the print/online upsell has been like heroin. Euphoric (25-35% on the way up) and paralyzing lethargy on the way down. Now online growth struggles to reach double digits at most companies, even as online ad spending continues to boom ahead at 18%+ growth rate. The smartest companies have profoundly shifted sales resources and sales training toward online-only, seeing their growth futures in the online ad economy. If McClatchy is a good way's along on licking its upsell habit, that may provide a good foundation for growth, especially as its participation in the Yahoo AMP network rolls out later this year.  Two more online revenue growth questions: a) Wouldn't it be great if each quarterly earnings report broke out online-only sales, by revenue in dollars and by percentage of overall online revenue? That would provide the market a new benchmark to gauge how much companies are building a future, not just cutting a past. b) What's going on with Lee's online growth number? Coming in at a negative 9.1%, it's a head-scratcher. We know that newspaper companies each bring their own unique accounting to print/online revenue allocations, and that could be an issue here. Or could be the upsell addiction, though Lee has put a lot of energy into transforming its sales as well. The next quarter's number will be fascinating to hear.
3. So you think current cuts are tough? Lee told us they cut 2.3% in expenses, this quarter 2008 compared this quarter 2007. But CEO Mary Junck added she plans additional expense cuts of 5-7% in the coming year. That could be lots of newsprint and jobs. McClatchy CEO Gary Pruitt pegged further non-newsprint expense cutting at more than 10%. Other CEOs tell a similar story.
4. Does the June Swoon portend a worse second half? Check out the New York Times Co. June numbers compared to its 2Q numbers. For the quarter, the company was down 10.6% in ad revenue. For June, it was down 17.8%. The Times said entertainment advertising was the prime culprit for June's further turndown, but then said it could be 'til the end of the third quarter before things "loosen up." Gannett's numbers, 2Q (13.5%) vs June (down 16.3%) show the same trend.
5. When do we acknowledge that the classified economy model is broken? What we saw in the 2Q numbers was a 20%+ downturn from 2007. Recall the 2007/2006 2Q comparisons. Those were down 16.4% (that's a print-only number) for McClatchy, for instance. It's not just the fact that the economy/subprime mess has wreaked havoc in real estate, recruitment and auto. It's also the fact that reliance on the internet and its interactivity -- at many sites other than newspaper-owned ones -- increases by the month. Consider Media General's big dive -- 29.5% in a quarter. 
6. Are dividends the next to go? Pruitt made a point of saying the company would be reviewing its dividend payout at its next meeting; last year, the company didn't increase its dividend for the first time in years. That's only prudent, as Wachovia analyst Jon Janedis has pointed out. Companies in survival mode -- and that's where they're at -- are better off reducing debt and otherwise trying to hold their operations together -- if they can family members and other investors to take lesser or no payouts. Other companies have followed Gatehouse's rich dividend approach, with Gannett upping its payout by 30% less October.
7. How much of the new circ pricing strategy will stick? The New York Times has been raising prices since mid-last year and plans more increases in August, reporting success -- 2.5% increase in circ revenue. The Journal recently announced a whopping 33% increase from $1.50 to 2 for single copy, and papers as diverse as Toledo Blade, Chicago Tribune and Washington Post have joined in increasing print prices. Pricing comes against the numbers of continued circ revenue reduction for most companies: Gannett at -2.1% and McClatchy at -5.2%.  My guess: the big national papers find more success here than the metros, who are cutting their products back and asking for a more payment.
8. How long will Americans luxuriate themselves? Luxury goods have been a key growth line for both the New York Times and the Wall Street Journal, as both target luxury buyers with niche publications and sections. Janet Robinson noted that watches and fashion have continued big for the Times. The Journal itself just wrote about the phenomenon of Americans keeping up their lux purchases, despite the downturn. But investors sense this trend may not last -- pushing down luxury stocks 13% just since the end of May.
9. And of course, the biggest question: So how much of this lost advertising comes back when the economy recovers? That's the 64 million pixel question. Of course, some of it will, but it's dreaming to believe it will all come back as it has after previous downturns.  You can't blame them from hoping, but that hope may be beyond audacious.

Content Bridges: More 9 Questions

Comments

[David]

Great post - thank you! BTW, you don't actually have to listen to the webcasts -- media sector transcripts are available after the call here:
http://seekingalpha.com/articles/list?tags=transcripts,media

and you can do some very neat things with search, as explained here:
http://seekingalpha.com/page/power_search

[John Kennedy]

These are great questions! I wrote a high level view last week on "What I Would Do if I Owned a Newspaper"

Feel free to click on my name to read. I would appreciate your feedback. It's ugly out there!

Thanks,

John Kennedy