Read The Dow Jones Q2 Advertising Revenue Results And Shareholders Should Be Kissing Rupert Murdoch’s Feet That He Is Offering A 65% premium; Results From The Likes of Gannett, McClatchy, and Media General Tell The Same Sorry Newspaper Story

Philip M. Stone July 20, 2007

Down, down, down. There’s no other way to describe the Q2 financial performance of US newspapers and frankly for this year at least there is no light at all at the end of the tunnel. Truth is, for the likes of the Los Angeles Times (Tribune) and the Tampa Tribune (Media General) the word “down” doesn’t really do it justice. Try “freefall”.

Everyone is waiting for the Bancroft family to make up their minds whether to accept Murdoch’s $60 a share offer. The Bancrofts should look closely at the Q2 results for the Wall Street Journal announced Thursday that proves Dow Jones is a mid $30s share without Rupert’s 65% premium – the newspaper’s print advertising revenues fell 6.8% and July is looking “soft” (then what do you call Q2?) and don’t look for much in the way in gains for all of Q3. So far this year the Journal’s advertising is down 4.3% from a year ago and that’s even though the newspaper started last fall to accept very expensive ads on its front page.

Although the Dow Jones board has approved the merger it is now up to the family that begins meetings next week. Investors are getting even more skittish that the deal may turn south – the company’s share price closed down at $55.40 Thursday, 7% below Murdoch’s offer.

At The Los Angeles Times, the largest newspaper in the Tribune stable that has to do well to serve as the foundation for the debt payments under the Sam Zell privatization, publisher David Hillier has announced that in Q2 overall revenue dropped 10%, but far worse when it comes to funding debt, cash flow plunged 27%. His own description of that performance: “One of the worst quarters ever experienced.” and he aims to make up some of that lost ad money via front page advertising.  For the year so far at the Times ad revenue is down 8%.

That kind of financial performance scares away investors and even though Tribune says it has the financing in place for the privatization at $34 a share, the shares closed Thursday at $29.56, 13% below the offer price. Some people are just not so sure!

Turn then to Media General which owns three metropolitan newspapers, 22 daily community newspapers, more than 150 weekly newspapers, and 23 TV stations. The publishing unit in Q2 saw profit drop 28.7%. Total publishing revenue fell 9.6%, and newspaper advertising revenue was down 11% from a year earlier. Its largest newspaper, The Tampa Tribune, saw classified sales fall into a sink hole – off 36.7%. And if that is not bad enough the company expects lower classified advertising in Q3.

Everyone’s eyes are on McClatchy. Did it do right in buying Knight-Ridder? The share price has suffered close to 50% but what’s happening on the revenue side? In CEO Gary Pruitt’s own words: “Advertising revenue worsened across the board in the second quarter of 2007, but particularly in real estate advertising. Nearly three-quarters of our advertising declines are coming from California and Florida, two regions that benefitted strongly from the real estate boom, and are likewise being hurt in the subsequent real estate slowdown.”

The good news was that expenses were down 12.2%, operating cash flow was up 4.4% and operating cash margin was up 26.9%.

One thing that investors like about McClatchy is that it has embarked on a major mission to reduce debt. It was down $79 million from the end of Q1, but it still stands at a whopping $2.68 billion, thanks to the Knight Ridder buy. The company business plan is to reduce that debt via more asset sales by around $600 - $700 million over the next 18 months.

Dissect the advertising drops and it is pretty dramatic reading. McClatchy was down 21.1% in Florida and it was down 15.1% in California. Overall retail was down 6.2%, national down 9.4% and classifieds down 14.9%. As Pruitt said, real estate hurt the most, down 19%, followed by auto 15.4% and employment down 15.5%.

And Pruitt’s solution for the future, with revenues still forecast to sink further, is “continued focus on cost controls to help offset the impact of the revenue challenges.” In other words – more of the same.

And then there is the biggest US newspaper publisher of them all -- Gannett – and newspaper revenue wasn’t very bright there, either. The chain of 85 newspapers, including the country’s largest, USA Today, saw advertising revenue down 5.3% for Q2 – USA Today itself was down 1% -- June alone saw the group’s newspaper ad revenue slump 6.2% indicating things are not getting any better as the year progresses.

But Gannett’s chief executive Craig Dubow is one of those who subscribes to the “cyclical” argument that all of this will blow over in time. “We are in the midst of a cyclical downturn where we and our advertisers are competing for an unpredictable consumer who has more choices. We’re in an extremely tough ad environment.”

Now this was said on the day the Dow Jones Industrial Averages closed at an all-time high, just breaking through 14000. The market has been going up for some two years and during that time newspapers shares have fallen dramatically. How can what is happening in the newspaper business be called “cyclical” anymore?

Advertisers are taking their spend elsewhere and a new survey even indicates they are beginning to think the best place for their advertising money are their own web sites.

The Gannetts and McClatchy’s of this world are doing as well as they are by cutting their costs and introducing new business models on how they run their print business.  But anyone who thinks these new policies are just “cyclical” is in for a sorry surprise. The days of lower newspaper advertising are here to stay as advertisers face so many new choices they never had before.

How newspapers fit into that new world, instead of thinking the good old days will return, will decide their ultimate fate.

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