April 20, 2016 Last Updated 11:52 am

McClatchy’s Q1 earnings report finds ad revenues still falling, company reports $12.7M net loss

Strong growth in digital cannot overcome continued print advertising losses, as well as a decline in audience revenue, said the newspaper publishing company

SACRAMENTO, Calif. – April 20, 2016 – McClatchy today reported a net loss in the first quarter of 2016 excluding certain items (adjusted loss), of $7.9 million, a 9.8% improvement when compared to an adjusted loss in the first quarter of 2015 of $8.7 million.

On a GAAP basis, the company reported a net loss in the first quarter of 2016 of $12.7 million, or $0.16 per share. In the first quarter of 2015, the company reported a net loss of $11.3 million, or $0.13 per share.

Pat Talamantes, McClatchy’s president and CEO, said, “We entered 2016 optimistic that our ongoing digital strategies and momentum from 2015 would propel us forward and indeed they are doing so. Our digital audiences have never been greater, the demand for our journalism never stronger and our digital ad solutions are in tune with the specialized services and products our advertisers want. Our digital-only revenues had strong growth in the quarter, up 18% when compared to first quarter of 2015. Our average total unique and local unique visitors reached nearly 52 million and 14 million, respectively, as of the end of March 2016—a record for first quarter results. We again utilized free cash flow to reduce debt, repurchase $30.8 million of bonds, and further return value to shareholders by repurchasing 3.3 million shares of Class A Common stock for $3.6 million in the first quarter of 2016. Our free cash flow for the trailing 12 months ended March 27, 2016 was $56 million.

“As we continue our digital transformation, we remain focused on reducing legacy expense and finding efficiencies. At the same time, we are placing constant emphasis on delivering public service journalism that matters to our readers and meets the highest standards. Just this week, McClatchy newsrooms were well represented in the Pulitzer Prize announcements. The Sacramento Bee’s editorial cartoonist, Jack Ohman, was awarded a Pulitzer Prize, and The Miami Herald was named a Pulitzer finalist in the local news category for an investigative project on a South Florida police department that secretly laundered millions of dollars in illicit funds. The work by Jack Ohman and Miami’s Mike Sallah, who led a team on the “License to Launder” series, extends a 10-year streak of Pulitzer recognition for McClatchy newsrooms. We congratulate Jack, Mike and the Miami team for their recognition.

“We believe the success of our digital transformation, legacy expense reductions, and real estate monetization efforts will allow us to improve our financial position and create value for our shareholders. On Feb. 11, 2016, we contributed six separate properties, inclusive of land and buildings valued at $47.1 million to our pension plan, reducing our pension obligations.

“In April, we began actively marketing our Sacramento, CA, Kansas City, MO, and Columbia, SC main office buildings and printing facilities for potential sales/leaseback transactions. These assets represent a few of the larger in-sourcing facilities held by McClatchy and each are located in attractive growing markets. Proceeds from these sales would be used to reduce the company’s debt obligations, reinvest in our business or other corporate purposes as determined by management and the board of directors.”

First Quarter Results
Total revenues in the first quarter of 2016 were $238.0 million, down 7.5% compared to the first quarter of 2015. Total advertising revenues were down 9.9% compared to the first quarter of 2015, and represented a two-percentage point improvement from the fourth quarter of 2015. The decline in advertising revenue is largely attributable to the performance in print advertising as the category experienced further declines, albeit at a slower pace than the declines in 2015. Growth in digital advertising, and particularly digital-only advertising, helped mitigate the print declines.

For the first quarter of 2016, digital-only advertising revenues grew 18.0% and total digital advertising revenues were up 4.1% compared to the same quarter last year. The strongest area of growth in digital came from the national advertising category where digital advertising was up 36.7%. Once again our national digital revenues grew enough to more than offset the print declines, resulting in total national revenue growth of 3.3% in the first quarter of 2016 compared to the first quarter of 2015. This is the third consecutive quarter in which total national advertising revenues has grown due to its digital performance, more than doubling its growth rate from the fourth quarter of 2015.

Audience revenues were $90.7 million, down 2.7% in the first quarter of 2016 from the same quarter in 2015, but digital audience revenues grew 4.5%, reflecting the impact of pricing initiatives. Digital-only audience revenues were up 10.1%, and the number of digital-only subscribers ended the first quarter of 2016 at 78,400, representing an increase of 5.7% from the same quarter 2015.

Product enhancements, audience growth initiatives, and award winning journalism led to yet another quarter of strong growth in digital audiences. During the first quarter, average total unique and local unique visitors to the company’s online products grew to approximately 51.8 million and 13.7 million, respectively. This represented average growth of 12.8% in total unique visitors and 11.9% in local unique visitors in the first quarter of 2016, compared to the first quarter of 2015. Mobile users represented 57.8% of total monthly unique visitors in the first quarter of 2016, up from 49.6% in the first quarter of 2015.

Revenues excluding print newspaper advertising accounted for 69.5% of total revenues in the first quarter of 2016, an increase from 66.2% in the first quarter of 2015.

Results in the first quarter of 2016 were impacted by the following items:

  •  Restructuring charges totaling $4.3 million ($2.6 million after-tax);
  •  Severance charges totaling $3.0 million ($1.8 million after-tax);
  •  Accelerated depreciation charges totaling $2.8 million ($1.7 million after-
    tax);
  •  A gain on the extinguishment of debt totaling $1.5 million ($1.0 million
    after-tax)
  •  Non-cash charges related to a write down of an equity investment totaling
    $0.9 million ($0.6 million after-tax); and
  • Net decrease in taxes totaling $0.9 million for adjustments of certain
    deferred tax credits related to tax positions taken in prior years.

Adjusted losses excluding the items above were $7.9 million. Operating cash expenses, excluding severance and certain other charges, declined 7.7% from the first quarter of 2016 to the same quarter last year. Operating cash flow was $25.8 million in the first quarter of 2016, down 5.4% compared to the first quarter last year. (Non-GAAP measurements impacting net loss, cash expenses and operating cash flows are discussed below.)

Other First Quarter Business and Financial Highlights
Debt at the end of the first quarter of 2016, after repurchasing $30.8 million of bonds, was $906.5 million. The company finished the first quarter of 2016 with $17.6 million in cash. The leverage ratio at the end of the first quarter as defined in the company’s credit agreement was 4.66 times cash flow compared to a maximum leverage covenant of 6.0 times cash flow (as defined).

Income from equity investments declined $2.0 million in the first quarter of 2016 compared to the first quarter of 2015 and included an impairment of one of its equity investees of $0.9 million.
During the first quarter of 2016, the company repurchased approximately 3.3 million shares of Class A Common stock at a weighted average price of $1.09 per share under its share repurchase program. The program provides for $15 million of share buybacks through 2016. Under the program, total cumulative shares repurchased through the first quarter 2016 were approximately 9.5 million shares, or $11.5 million of the total authorized buyback program.

Outlook

The Company plans to further execute on the strategic initiatives that were laid out in 2015 as well as new initiatives during 2016. McClatchy is also dedicated to finding advertising solutions by working with its industry peers.

Pat Talamantes said, “Just a few days ago we announced the formation of an exciting new company, Nucleus Marketing Solutions (Nucleus), with Gannett, Hearst, and Tribune Publishing. Nucleus, a premier marketing solutions provider, will connect national advertisers to the top U.S. local publishers’ highly engaged audiences across existing and emerging digital platforms. In addition to the news organizations owned by the founding companies, the network expects to include as many as 11 other affiliate partners across the top U.S. advertising markets. You will be hearing more about this exciting new company, as well as expansion in partnerships like the Local Media Consortium (LMC), as we continue to find ways to serve both large advertisers and local businesses in our communities.”

Looking to the second quarter and the remainder of 2016, the company expects to report double-digit growth in digital-only advertising revenues for the second quarter and full-year 2016. While the company remains steadfast in communicating the value of print advertising, the declining trends in direct marketing and print advertising are not anticipated to subside in the next few quarters. Although these trends eased in the first quarter 2016, management believes that print advertising will continue to become a smaller portion of advertising and total revenue.

Audience revenues are expected to be down in the same range in the second quarter as the first quarter of 2016. Management will be vigilant in reducing legacy costs and finding efficiencies and expects cash expenses to decline in the second quarter and full year 2016. Management will also remain focused on growing digital revenue, stabilizing operating cash flow, reducing debt and interest costs and creating shareholder value.

The company’s statistical report, which summarizes revenue performance for the first quarter of 2016, is attached.

McClatchy-Q1-16

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