Lee Enterprises reports lower ad revenue, higher subscriptions after expense reclassification
The newspaper chain Lee Enterprises, publisher of the St. Louis Post Dispatch and other papers, reported its Q2 earnings this morning.
Lee reported advertising revenue fell 5.3 percent to $213.1 million, though it grew digital revenue 7.7 percent to $38.8 million. Digital now accounts for 18.2 percent of total ad revenue.
The company also reported subscription revenue grew 12.7 percent. But they also noted that “(E)xcluding the impact of the subscription-related expense reclassification, subscription revenue increased 2.4%.” Read into that what you will.
Here is a portion of the Lee Enterprises earnings statement (you can find the full report here):
DAVENPORT, Iowa – May 7, 2015 — Lee Enterprises, Incorporated, a major provider of local news, information and advertising in 50 markets, today reported preliminary earnings of 3 cents per diluted common share for its second fiscal quarter ended March 29, 2015, the same earnings as a year ago. Excluding unusual matters, adjusted earnings per diluted common share totaled 2 cents, compared with earnings of 5 cents a year ago.
Mary Junck, chairman and chief executive officer, said: “We’re seeing positive results from our many sales initiatives as our operating revenue trend for the quarter improved to up 0.9% as reported and down 1.8% on a comparable basis. March especially was the bright spot, posting nearly flat revenue – our best month since April 2013. Total digital revenue increased 33.9% from the same quarter a year ago.”
“Our full access subscription model is now in 43 markets, allowing subscribers to consume local news, information and advertising using all of our print and digital platforms.
“We’re focused on providing easy and effective ways for small and mid-sized local advertisers to reach more customers, and through our digital agency, we can tailor programs for larger local businesses with more specific goals. Advertisers are reaching massive audiences through our print and digital products.”
She added: “For the first six months of our fiscal year, cash costs(2), on a comparable basis, decreased 1.2%. Our keen focus on business transformation allows us to improve our full-year guidance, and we now expect comparable cash costs to decrease up to 2.75% in 2015. At the same time, we remain committed to providing exceptional journalism, as evidenced by the Pulitzer Prize for Breaking News Photography recently awarded to the St. Louis Post-Dispatch. Their recent work is outstanding, and the Post-Dispatch staff is extremely deserving of this recognition.”
She also noted the following financial highlights for the quarter:
- Digital advertising revenue increased 8.3% and mobile advertising revenue, which is included in digital advertising, increased 37.9%;
- Subscription revenue, excluding the subscription-related expense reclassification discussed more fully below, increased 4.7%, and we expect full year 2015 subscription revenue, excluding the impact of the reclassification, to increase 2.5-3.0%; and
- Debt was reduced $20.3 million in the quarter and, when including $32 million borrowed to pay 2014 refinancing costs, debt was reduced $80.8 million in the last twelve months.
SECOND QUARTER OPERATING RESULTS
Operating revenue for the 13 weeks ended March 29, 2015 totaled $155.5 million, an increase of 0.9% compared with a year ago. Excluding the impact of a subscription-related expense reclassification as a result of moving to fee-for-service delivery contracts at several of our newspapers, operating revenue decreased 1.8%. This reclassification increases both print subscription revenue and other operating expenses, with no impact on operating cash flow(2) or operating income. Certain delivery expenses were previously reported as a reduction of revenue. Tables later in this release detail the impact of the reclassification on revenue and cash costs.
Combined print and digital advertising and marketing services revenue decreased 4.9% to $97.7 million, with retail advertising down 5.1%, classified down 4.8% and national down 11.8%. Retail preprint advertising decreased 5.6%. Combined print and digital classified employment revenue decreased 5.1%, while automotive decreased 9.6%, real estate decreased 10.1% and other classified increased 0.7%. Digital advertising and marketing services revenue on a stand-alone basis increased 8.3% to $18.8 million. Print advertising and marketing services revenue on a stand-alone basis decreased 7.6%.
Subscription revenue increased 14.7%. Excluding the impact of the subscription-related expense reclassification, subscription revenue increased 4.7%. Our average daily newspaper circulation, including TNI and MNI and digital subscribers, totaled 1.0 million in the 13 weeks ended March 29, 2015. Sunday circulation totaled 1.4 million. Amounts are not comparable to the prior year period due to changes in measurements by the Alliance for Audited Media.
Total digital revenue, including advertising, marketing services, subscriptions and digital businesses, totaled $27.4 million in the quarter, up 33.9%.
Cash costs increased 3.3% for the 13 weeks ended March 29, 2015. Compensation increased 3.7%, driven by increases in employee medical and pension costs, as well as compensation increases, which were partially offset by a decline in the average number of full-time equivalent employees of 3.9%. Newsprint and ink expense decreased 17.9%, primarily the result of lower newsprint prices and a reduction in newsprint volume of 10.9%. Other operating expenses increased 5.9%. Excluding the impact of the subscription-related expense reclassification, cash costs decreased 0.2%. We expect our full year cash costs, excluding the impact of the subscription-related expense reclassification, to decrease between 2.25%-2.75% in 2015. To achieve this level of cost reduction, cash costs for the remainder of the fiscal year will need to decrease by 3.3%-4.3%, which significantly exceeds the decrease of 1.2% for the 26 weeks ended March 29, 2015. This acceleration of cost reduction in the latter half of 2015 may also have a favorable impact on the following year.
Operating cash flow decreased 7.7% from a year ago to $30.2 million. Operating cash flow margin(2) decreased to 19.4%, compared to 21.2% a year ago. Including equity in earnings of associated companies, depreciation and amortization, as well as unusual matters in both years, operating income totaled $20.2 million in the current year quarter, compared with $23.7 million a year ago. Operating income margin was 13.0% in the current year quarter. The subscription-related expense reclassification reduced operating cash flow margin and operating income margin by 0.6% and 0.4%, respectively.
Non-operating expenses decreased 14.8% for the 13 weeks ended March 29, 2015. Interest expense decreased 10.5% due to lower debt balances and non-cash interest expense of $1.2 million in the prior year quarter. We recognized $1.5 million of amortization of debt refinancing costs in the current year quarter compared to $0.1 million in the prior year quarter. We recognized $2.1 million of non-operating income in the current year quarter due to the change in fair value of stock warrants issued in connection with our refinancing in 2014. Income attributable to Lee Enterprises, Incorporated for the quarter totaled $1.8 million, compared with $1.5 million a year ago.