A Look At The Financial Results Of Some of Europe’s Internet And Media Companies Shows It Is Not All Smooth Sailing

Philip M. Stone May 18, 2006

With all the headlines about how print is hurting, East Europe is thriving, and the Internet is THE Business to be In, how does all of that pan out when looking at some representative European media financial results? A study of the year’s results thus far for Schibsted, Sanoma WSOY, Tiscali, and European results for News Corp. indicates the business is taking some twists and turns. Go To Follow Up & Comments

Take Tiscali, the Italian-based international ISP operator, for instance. Even though sales were up in the last quarter 17% year-on-year its net loss also widened year-on-year to 19.3 million Euros from €13.7 million. And net cash declined 42% to just €17 million with net debt standing at €314 million.

Tiscali had been a high ISP flyer during the initial Internet burst in the 1990s with operations throughout Europe, but it has suffered in recent years from competition and a lack of investment. The financial crunch forced the company to discontinue operations in the past couple of years in Denmark, France, and South Africa and it now concentrates on developing its business in the UK, The Netherlands, Germany and home-turf Italy.

Ovum, a newsletter that follows closely Europe’s IT and telecoms business, says bluntly that Tiscali is “living on borrowed time.”  Ovum likened Tiscali’s financial position to someone who keeps refinancing their house, repaying debts while at the same time taking in funds for current and future spending.  “Should the value of the property stop rising as anticipated, the door to credit will shut and difficult choices emerge, as the debt may not be repaid and the specter of repossession looms,” Ovum commented.  Not exactly a positive read.

And then there is the Agora Group, Poland’s largest publisher that has had a really horrible few months. A year ago it earned 43 million zloty (€10.75 million) in the first quarter; this year it was just 0.8 million zloty (€200,000). A 98% drop!

What happened? It is being crushed between two strong jaws.

As a public company shareholders didn’t take to the forecast losses and increased investments at Nowy Dzien, a newspaper it started publishing in November, and they punished the shares severely. Management announced on one February day it was standing behind the paper and planned investments for the rest of the year and literally the next day they closed it down, such was the market’s volatility. So after just three months the project died with all the start-up and closing down costs that action ensued – said to have been around 22 million zloty (€5.5 million).

The other jaw belongs to Axel Springer that launched in April its own new newspaper, Dziennik, with a cover price of 1.50 zlotys (€0.38)  – a full 46% lower than Agora’s leading newspaper, Gazeta Wyborcza.

Springer had already stung Agora in 2003 when the German publisher launched its Fakt tabloid that quickly became the country’s circulation leader, pushing GW’ into second place, so three days after Dziennik’s launch Agora lowered GW’s newsstand price to match Springer’s price. That in turn saw another shareholder revolt –a one-day 7.8% drop in the value of Agora shares. Investors believed the lower price indicated that some GW readers had defected and they figured lowering the newsstand price for the rest of the year could mean around a 35-40 million zloty (some €9-10 million) fall in expected Agora 2006 profits – a drop of about 50%.

Agora really does have it tough. The general feeling in Warsaw is that there is little expansion left to gain new newspaper readers so any new paper must get the majority of its readers from existing publications. With Dziennik priced so much below GW, management feared severe readership defection – maybe up to 100,000 or so -- unless it met the newcomer’s price.

Springer says that the average daily sales of the Dziennik are in excess of 200,000 – the business plan was to reach 150,000 and some media reports have said the circulation is already as high as 300,000. Gazeta Wyborcza said that its sales when Dziennik launched was 502,000. Thus Springer is doing better than expected but no word yet whether GW is holding onto its subscriber base or whether Springer’s success is somewhat at GW’s expense. Stay tuned.

Even though revenues held steady in Q1, net profit almost disappeared. The company also operates radio stations and an outdoor advertising business.

Moving north to the Nordic area, two rock-solid media companies announced results that were somewhat surprising – falling net profit for both.

At SanomaWSOY, the Nordic region’s largest media group, revenue grew 5% in the first quarter, but operating profit dropped 6.8% from €48.9 million in Q1 2005 to €45.6 million in Q1 2006 although when one-time capital gains are removed the drop is just 2.1%, but a drop all the same. One reason may be that the number of employees increased 11% over the same period last year, although the company says that traditionally the first quarter is usually its weakest and it will pick up steam throughout the year.

What is interesting about SanomaWSOY, based in Helsinki, is its expansion into neighboring Russia. Last year SanomaWSOY bought the publishing company responsible for printing Russian editions of Cosmopolitan, Good Housekeeping, and FHM, a daily business newspaper, and the English-language Moscow Times and St. Petersburg Times. It launched additional Russian language magazines during the first quarter.

The company estimates that while media advertising is expected in 2006 to grow by 1-5% in western Europe, in Russia print media advertising is expected to grow by 18%. Already the company earns nearly half of its revenue from outside Finland and it is planning more foreign investment in Russia and eastern Europe.

It expects overall sales for the year to increase by 4% because of strong economic growth forecast for the Nordic region and eastern Europe. It prints 220 magazines in 12 countries and publishes Helsingin Sanomat, the Nordic area’s largest circulation broadsheet newspaper.

Meanwhile in Oslo, Schibsted reported its first quarter profit down 30% over the same period last year, to 278 million nkr (€36 million) from 401 million nkr (€52 million). The good news was that financial analysts had expected an even bigger drop. The bad news is that profits at its flagship Norwegian tabloid, VG, are sinking fast and the newspaper is now looking to make between 70 – 90 staff redundant by the end of 2007.

The company blames increased investment for the profit drop but is just part of the story for increased investments totaled only 64 million nkr (€8.3 million) in the quarter compared with 20 million nkr (€2.6 million) a year ago. VG’s profit in Q1 was a third less (25 million nkr, €3,25 million) than for the same period last year.

Schibsted said it would concentrate on organic growth in 2006, with investments of about 300 – 400 million nkr (€52 million). Schibsted owns the 20 Minutes free newspaper brand – its French revenue grew 34% and its Spanish revenue was up 31% in the quarter -- and it plans to aggressively market it internationally along with matching web sites, perhaps using local newspaper as partners.

The big success story is with its two Swedish newspapers, Aftonbladet and Svenska Dagbladet. They reported record profits due to increased circulation and advertising, indeed Svenska Dagbladet had its best-ever quarter with advertising revenue up 26% over last year and circulation growing by 8,300 to 197,600.

But at home the big problem is VG. Like many newspapers around the world VG has been bleeding circulation and advertising for some time, but when you combine the page views and advertising revenues from its very profitable web site the multi-platform brand still does very well. But the print product, looked at alone, is down sharply on readers and advertising revenue, and although there had been that trend for a while it really hit home last year, and continuing into this year. The newspaper and the web site have similar revenues, but the cost structure for the web site is far less than for the newspaper.

So Editor-In-Chief Bernt Olufsen who has tried just about everything to stem print losses was told earlier this year to find some 20 million nkr (€2.5 million) in savings to implement by this month. He said at the time that meant implementing efficiencies but that the print edition’s quality would be maintained. But with the figures for the disastrous Q1 now in, Schibsted now wants a total 100 million nkr (€13 million) in VG savings through 2007, and that means more than just cost efficiencies; it means bodies gone – can that be done to the extent the company wants and still maintain the quality?

Last, but certainly not least, is News Corp. that saw global net profit double to $820 million in its third quarter based on strong earnings from its American cable and television divisions.

But newspapers were another story – earnings fell 18% mainly because of reduced profits in the UK, due to a reduction in advertising revenues even though circulation grew somewhat. The Times and Sunday Times alone lost  £46.9 million. Chairman Rupert Murdoch said his newspapers in Australia and Britain face “a difficult slog”.

“It’s hard work in both those places because there is not the growth in newspaper advertising that we’ve experienced in the past. The telecommunications industry has cut back on advertising without being replaced by anything else. But we are holding on well and certainly improving our competitive positions,” Murdoch told financial analysts.

A figure to ponder – News Corp had an operating profit of some €808 million in the third quarter. Of that about €122 million came from newspapers. That means just 15% of the profits of a media empire that was built on newspapers now comes from newspapers.

But perhaps the most interesting of News Corporation’s news came from Italy where Sky Italia has added 472,000 subscribers in the financial year and swung to an operating profit of €55 million, an improvement of some €70 million from a year ago. Its total subscriber count at the end of March was 3.71 million, an increase of 110,000 for the quarter.

The big question that had been hanging over Sky Italia was what affect the new Mediaset digital broadcasts of Italian football matches charged on an individual basis would have on Sky subscribers who were paying monthly subscriptions. Would they desert Sky and prefer to pay on a game-by-game process via Mediaset? Apparently not.

Murdoch has been spending around $2 billion buying up web sites of which MySpace is probably his best known. But the financial results were such that News Corporation announced it was doubling its buyback of shares from the existing $3 billion level to $6 billion.

And that means that Murdoch, who currently owns 31% of the company, is going to own a bit more when all is said and done, assuming he’s not going to sell.

“We’ve been aggressive buyers because of the value we see in acquiring the stock at such depressed levels,” Murdoch told analysts. “There’s frankly been no better use of our cash during this period than investing in new shares, particularly because we continue to trade at such a discount to our immediate peers and to the overall market.”

What is that old saying about the rich getting richer…?

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Schibsted’s Print VG Goes From Bad To Worse, But Online Goes From Strength To Strength - November 5, 2006

The situation at Schibsted’s VG print product just keeps getting worse -- Q3 circulation was down 9% (off 32,057 compared to the same period a year ago) and advertising was down 7%.  VG restructuring costs in Q3 totaled 34 million nok (€4 million, $5.25 million), and in the fourth quarter there will be an additional 60 – 70 million nok charge (€7.25 million – 8.5 million, $9.4 million – 11 million).

The good news for VG, and part of the reason for the bad news on the print side, is that VG Nett’s online activities saw a 47% increase in Q3 compared to a year earlier. Net operating margin was 43% compared to 39% a year ago.

Indeed, Schibsted is rapidly seeing online become a major part of its total revenues – 41% of the Group’s operating profit. Q3 revenues from all online activities increased 69%.

But those print restructuring costs saw Schibsted post overall 3rd quarter pretax profit of 114 nok (€14million, $18 million), down 42% from a year earlier.