October 27, 2015 Last Updated 12:45 pm

Newspaper chain McClatchy reports ad revenue down over 10% in Q3 earnings report

Publisher of the Sacramento Bee and Miami Herald reports losses in Q3 report, hopes higher growth in digital and cost cutting will lead to more stable results

The publisher of the Sacramento Bee and other dailies, The McClatchy Company, became one of the first newspaper chains to report third quarter earnings. Let us all hope the upcoming reports look more promising than the one released this morning.

SacBee-front-200McClatchy reported that through the first nine months of the year the company has recorded a loss of $309.0 million, though much of that can be attributed to impairment charges. The net loss from continuing operations for the first nine months is $5.4 million.

Advertising losses continue: total advertising revenues in Q3 were $156.7 million, down 10.2 percent from the prior year. Meanwhile, digital ad gains remain in the single digits.

Like other newspaper chains involved, McClatchy sold its interest in Cars.com and Apartments.com. So far this year the company has received $30.8 million in proceeds from the Classified Ventures sales.

Where does McClatchy go from here? Management said it expects “digital-only advertising revenues to accelerate into the high-teens to low-twenty percent range” – but even if that occurs, and I am doubtful, that level of growth doesn’t look like it will overcome losses in print advertising.

This can’t go on indefinitely.

Both The New York Times Co. and Gannett report earnings on Thursday, Tribune Publishing reports on November 5.

Here is McClatchy’s earnings statement:


SACRAMENTO, Calif. – October 27, 2015  — The McClatchy Company  today reported net income from continuing operations in the third quarter of 2015, excluding certain items (adjusted earnings), of $3.2 million, an improvement when compared to a net loss from continuing operations in the third quarter of 2014, adjusted for similar items, of $0.7 million.

On a GAAP basis, the company reported a net loss from continuing operations in the third quarter of 2015 of $1.1 million, or $0.01 per share, also an improvement when compared to the results reported for the same period in the previous year. In the third quarter of 2014 the company reported a net loss from continuing operations of $2.6 million, or $0.03 per share, and including the impact of discontinued operations, was a net loss of $2.8 million.

Pat Talamantes, McClatchy’s president and CEO, said, “Despite challenging headwinds, our revenue and expense initiatives continue to gain traction. This is evidenced by the improvement we saw in our operating cash flow trend in the third quarter compared to the first two quarters of 2015. We expect this trend to continue to improve with growth in operating cash flow in the fourth quarter.”

Talamantes continued, “We were also busy this quarter strengthening our capital structure. We reduced debt principal by $25 million during the quarter by repurchasing bonds at a discount to par. We saw an improvement in our trailing-twelve-month free cash flow generation compared to fiscal 2014 as cash interest continues to decline, and we continue to keep tight control over capital expenditures. Additionally, we took advantage of our undervalued stock by repurchasing approximately 1.35 million shares of Class A Common stock during the quarter. Importantly, our cash position remains strong. We received a $7.5 million cash distribution from CareerBuilder early in the third quarter and we ended the quarter with $19.6 million in cash. And our cash balance on a proforma basis, including $23.3 million that we received early in the fourth quarter from funds that were held in escrow for the sale of Classified Ventures, is $42.9 million. Our efforts to improve our capital structure aren’t stopping there. In the fourth quarter we have embarked on a review of our real estate assets to identify strategic monetization alternatives that we may choose to pursue over time.”

Third Quarter Results

Total revenues, including gross sales of Cars.com and certain other digital products and services, in the third quarter of 2015 were $258.1 million, down 7.0% compared to the third quarter of 2014. Total advertising revenues, based upon gross sales, were $156.7 million, down 10.2% compared to the same quarter last year. The third-quarter performance for total advertising revenues reflects an improvement in trend of just over two percentage points compared to results for the first half of 2015. Notably, national advertising revenues increased 2.0% during the quarter, an important factor leading to the improving trend in total advertising. National digital advertising revenues finished up 35.2% for the quarter, more than offsetting the decline in print-related national advertising revenues.

Overall, the decline in total advertising revenue compared to the 2014 third quarter was driven by the decline in print-related revenue, which was partially offset by growth in total digital and digital-only advertising revenue. For the third quarter of 2015, digital-only advertising revenues reported on a gross basis grew 9.6% and total digital gross advertising revenues were up 0.8% compared to the same quarter last year. The pace of growth in digital-only advertising revenues increased significantly from 4.7% in the first half.

On a GAAP basis, which reports revenues associated with the sales of Cars.com and certain other digital products and services net of wholesale fees paid to third-party vendors, total revenues in the third quarter of 2015 were $251.2 million, down 7.9% compared to the third quarter of 2014. Advertising revenues were $149.9 million, down 11.8% compared to the same quarter last year.

Direct marketing advertising revenues declined 2.8% in the quarter, an improvement compared to reported results in the first and second quarters of 2015. The improving trend reflects the cycling over of results from the third quarter of 2014 that included the elimination of certain niche products, as well as the successful rollout of new products offered in our markets.

Audience revenues were $89.3 million, down 2.2% from the same quarter in 2014. As a result of pricing initiatives and continued growth in digital subscriptions, total digital audience revenues grew 12.4% compared to the same quarter last year, and digital-only audience revenues were up 34.4%. Digital-only subscribers grew to 77,600 in the third quarter of 2015 representing an increase of 16.4% from the third quarter of 2014. The monthly unique visitor count finished the quarter down 3.2% compared to the same quarter last year when monthly unique visitors were up 11.4%. Mobile users continue to grow and represented 54.9% of total monthly unique visitors in the quarter.

Total revenues on a gross basis, excluding print newspaper advertising, accounted for 68.9% of total revenues in the quarter, an improvement from 64.8% in the third quarter of 2014.

Results in the third quarter of 2015 included the following items:

  • A gain on the extinguishment of debt totaling $1.6 million ($1.0 million after-tax);
  • Severance charges totaling $2.6 million ($1.6 million after-tax);
  • Accelerated depreciation charges totaling $4.9 million ($2.9 million after-tax); and
  • Other restructuring charges totaling $1.4 million ($0.9 million after-tax).

Adjusted earnings excluding the items above were $3.2 million. Operating cash expenses, excluding severance and certain other charges, declined 7.2% from the same quarter last year. This decrease is in spite of an increase of $1.5 million of investments related to growth initiatives and digital infrastructure.

Operating cash flow from continuing operations was $39.7 million in the third quarter of 2015, down 11.5% compared to the third quarter last year, but reflects a significant improvement to the declines reported in the first and second quarters of 2015. (Non-GAAP measurements impacting income from continuing operations, cash expenses and operating cash flows are discussed below.)

First Nine Months Results

Including gross sales of Cars.com and certain other digital products and services, total revenues for the first nine months of 2015 were $791.9 million, down 6.9% compared to the first nine months of 2014. Total advertising revenues were $480.8 million, down 11.6% compared to the first nine months of last year. Difficult retail and national advertising performance caused print advertising to decline with some of the weakness partially offset by growth in digital-only advertising revenue. Advertising comparisons also reflect the loss of revenues resulting from the disposition of Apartments.com in April 2014.

On a GAAP basis, which reports revenues associated with the sales of Cars.com and certain other digital products and services net of wholesale fees paid to third-party vendors, total revenues for the first nine months of 2015 were $770.7 million, down 7.9% compared to the first nine months of 2014. Advertising revenues were $459.6 million, down 13.3% compared to the first nine months of 2014.

The company recorded a loss from continuing operations for the first nine months of 2015, excluding the net impact of certain items itemized below, of $5.4 million. The loss from continuing operations for the first nine months of 2014, when excluding similar items, was $4.0 million. (Non-GAAP measurements are discussed below.)

The net loss from continuing operations for the first nine months of 2015 was $309.0 million, or $3.54 per share, which includes non-cash after tax impairment charges related to goodwill and newspaper mastheads of $296.6 million. The net loss excluding these charges was $12.4 million. Net income from continuing operations for the first nine months of 2014 was $73.0 million, or $0.83 per share, which included among other items, a combined pre-tax gain of $145.9 million primarily from McClatchy’s share of the gain from Classified Ventures’ sale of Apartments.com and to a lesser extent a gain on the sale of its 50% partnership interest in McClatchy‑Tribune Information Services (“MCT”). Net income including discontinued operations for the first nine months of 2014 was $71.3 million, or $0.81 per share, while there were no such discontinued operations reported for the first nine months of 2015.

Results for the first nine months of 2015 included the following items:

  • A gain on the extinguishment of debt totaling $0.7 million ($0.5 million after-tax);
  • A distribution from Classified Ventures totaling $7.5 million and a gain related to the sale of Classified Ventures totaling $0.6 million (combined $5.0 million after-tax);
  • Non-cash goodwill and newspaper masthead impairment totaling $300.4 million ($296.6 million after-tax);
  • Severance charges totaling $10.7 million ($6.5 million after-tax);
  • Accelerated depreciation charges totaling $6.7 million ($4.0 million after-tax); and
  • Other restructuring charges totaling $3.1 million ($1.9 million after-tax).

Operating cash flow from continuing operations was $108.4 million for the first nine months of 2015, down 21.8% compared to the first nine months of 2014. (Non-GAAP measurements impacting income from continuing operations, cash expenses and operating cash flows are discussed below.)

Other Third Quarter Business and Financial Highlights

Interest expense declined $11.9 million in the third quarter of 2015 compared to the third quarter of 2014 and declined $34.3 million for the first nine months of 2015 compared to the first nine months of 2014. Cash interest is expected to decline about $42 million for all of 2015 as a result of lower debt balances compared to 2014.

Debt at the end of the third quarter of 2015, after repurchasing $25.0 million of bonds, was $966.1 million. The company finished the quarter with $19.6 million in cash. The leverage ratio at the end of the third quarter as defined in the company’s credit agreement was 4.59 times cash flow compared to a maximum leverage covenant of 6.0 times cash flow (as defined).

Income from equity investments declined $2.2 million in the third quarter of 2015. Income from equity investments included results from Classified Ventures in the third quarter of 2014 with no results in 2015 (Apartments.com sold on April 1, 2014, and Cars.com sold on Oct. 1, 2014). In early August of 2015, the company received a normal operating cash distribution of $7.5 million from CareerBuilder.

The company has received $30.8 million in 2015 related to distributions and proceeds from Classified Ventures. The previously disclosed distribution of $7.5 million was received in the second quarter of 2015 and the company received a cash distribution of $23.3 million during October 2015 relating to funds held in escrow as part of the company’s sale of its interest in Classified Ventures. The amount received from escrow represents a majority of the final proceeds from the Classified Ventures sale and will be recorded in the fourth quarter financial statements as a reduction of other current assets. A total of $2.3 million remains in escrow subject to final review of a potential sales tax claim that may have existed for sales incurred prior to the October 1, 2014 sale date of Classified Ventures.

During the third quarter of 2015, the company repurchased approximately 1.35 million shares of Class A Common stock at a weighted average price of $1.12 per share under its share repurchase program. The program, which was launched on April 24, 2015 and later revised on August 19, 2015, provides for $15 million of stock buybacks through 2016. Under the program, total cumulative shares repurchased through the end of the third quarter of 2015 are approximately 1.92 million shares, or $2.17 million of the total buyback approved through the end of 2016.

Outlook

For the fourth quarter of 2015, management expects digital-only advertising revenues to accelerate into the high-teens to low-twenty percent range compared to the fourth quarter of 2014. Direct marketing and audience revenues are expected to be approximately flat in the fourth quarter compared to the fourth quarter of 2014. For fourth quarter of 2015, cash expenses are expected to decline in the high-single-digit percent range reflecting the savings from McClatchy’s legacy cost reduction initiatives. Operating cash flow is expected to grow in the fourth quarter of 2015, the most significant quarter of the year for the company’s revenues and operating cash flow. Therefore, cash flow in the full second half of 2015 is expected to be approximately flat with the second half of 2014.

McClatchy-Q3-2015

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