McClatchy loses $95.6M in Q1, due to falling print advertising and impairment charges
With revenue dear, newsroom layoffs have been reported at several McClatchy-owned papers including yesterday at The Tribune in San Luis Obispo, California
The publisher of the Miami Herald and Sacramento Bee, McClatchy, reported earnings before the opening bell this morning. The newspaper publisher reported a net loss in the first quarter of 2017 of $95.6 million, caused by continuing falling advertising revenue, and a non-cash impairment charge of $123 million related to the carrying value of the company’s equity investment in CareerBuilder.
Total advertising revenue came in at $119.9 million, down 12 percent for the quarter, though digital-only advertising revenues grew 11.7 percent.
One chart shows just how bad advertising sales are at McClatchy right now:
Don’t expect this situation to turnaround. The company earlier this year replaced CEO Pat Talamantes with board member Craig I. Forman. His background is editorial and has held executive roles at both Yahoo and Earthlink.
McClatchy stock is down just over one percent in pre-market trading on the release of Q1 earnings, but rebounded when the market opened this morning.
With the falling revenue, no surprise that layoffs at McClatchy owned newspapers have been reported. Yesterday, New Times reported that The Tribune in San Luis Obispo laid off two full-time employees and two part-time staffers. Layoffs have also been reported at The News Tribune in Tacoma, Washington, and at The Fresno Bee in California.
Here is the earnings report:
SACRAMENTO, Calif. — May 4, 2017 — McClatchy today reported a net loss in the first quarter of 2017 of $95.6 million, or $12.60 per share that includes an after-tax non-cash impairment of $76.8 million on the carrying value of the company’s interest in CareerBuilder LLC (CareerBuilder). In the first quarter of 2016 McClatchy reported a net loss of $12.7 million, or $1.58 per share.
The company reported an adjusted net loss, which excludes severance and certain other items, in the first quarter of 2017 of $14.5 million, compared to an adjusted net loss of $7.9 million in the first quarter of 2016.
Craig Forman, McClatchy’s president and CEO, said, “No question the headwinds that have affected our industry for the past several years continued in the first quarter, including several retailer bankruptcies driving the loss of 40,000 retailing jobs. But at McClatchy, we are executing on our plan to accelerate the pace and cadence of our digital transformation while aligning our cost structure with the realities of the business environment.
“This quarter also highlights the unwavering commitment to quality journalism that is McClatchy at its best.” Forman added, “In all of our 30 newsrooms, we have dedicated ourselves to the kind of enterprise and ingenuity reflected in the projects recognized by the Pulitzer Committee, and we are grateful for our two Pulitzer Prizes this year — bringing to 54 the number awarded to McClatchy in our 160-year history.”
McClatchy’s Miami Herald, Washington DC Bureau, and expanding Video Lab teams, in collaboration with other media organizations, were honored with a Pulitzer Prize for Explanatory Reporting for their coverage of the Panama papers. In addition, the Miami Herald’s Jim Morin was awarded a Pulitzer for Editorial Cartooning, Jim’s second Pulitzer in this category. His work covered the national news including politics in 2016.
Elaine Lintecum, McClatchy’s vice president of finance and CFO, said, “We are optimistic about improvements in our adjusted EBITDA performance over the remainder of 2017. As we entered the first quarter of 2017 we anticipated lower advertising and weaker adjusted EBITDA results given our tougher comparisons to the digital growth in the first quarter of last year. However, the level of decline in adjusted EBITDA in the first quarter of 2017 does not reflect a trend that we expect to continue in the coming quarters. In the second quarter we launched our new audience management platform that we expect to help grow our digital-only subscribers and allow for enhanced subscription pricing optimization efforts. We also expect stronger results from our new digital marketing agency, exceleratetm, and coupled with our efforts to continue implementing efficiencies in our operations, we expect to report improving trends in adjusted EBITDA performance in the coming quarters.”
First Quarter Results
Total revenues in the first quarter of 2017 were $221.2 million, down 7.0% compared to the first quarter of 2016. The rate of decline in total revenues improved by 130 basis points sequentially from the 8.3% realized in the fourth quarter of 2016 and by a half a percentage point from the first quarter of 2016.
Total advertising revenues were $119.9 million, down 12.0% in the first quarter of 2017 compared to the first quarter of 2016. The decline in advertising revenues largely reflects the anticipated softness in traditional print advertising offset by improvements in direct marketing advertising and double-digit growth in digital-only advertising. Additionally, advertising attributable to the Easter holiday was recognized in the first quarter of 2016 while it fell in the second quarter of 2017.
Digital-only advertising revenues grew 11.7% in the first quarter of 2017 while total digital advertising revenues were roughly flat compared to the same quarter last year. Direct marketing declined 1.6% in the first quarter of 2017 compared to a decline of 8.8% in the same period last year, and reflects a sequential improvement of one percentage point from the fourth quarter of 2016. The improvement was mainly attributable to new customers in the second half of last year at a few of our markets and the impact of rolling over the elimination of certain products during 2016.
Audience revenues were $91.4 million, up 0.8% in the first quarter compared to the same period in 2016. Digital-only audience revenues were up 10.9% due to pricing strategies implemented throughout 2016 and subscriber growth. The number of digital-only subscribers ended the quarter at 84,500, representing an increase of 7.8% from the first quarter of 2016. The strength in our digital-only audience results were achieved despite the necessity to slow sales of digital-only subscriptions during the first quarter as the company prepared to transition to a new audience management platform. The new audience management platform was operational as of April 24, 2017, and is a critical component of our audience revenue strategies in fiscal year 2017.
Average total unique and local unique visitors to the company’s online products grew to 69.1 million and 16.7 million, respectively, in the first quarter of 2017. These results represented growth of 27.5% in total unique visitors and 15.8% in local unique visitors in the first quarter of 2017 compared to the same quarter last year. Mobile users represented 60.4% of average total unique visitors in the first quarter of 2017 compared to 57.8% in the first quarter of 2016.
Revenues exclusive of print newspaper advertising accounted for 74.4% of total revenues in the first quarter of 2017, an increase from 69.5% in the first quarter of 2016.
Results in the first quarter of 2017 included the following items:
- Non-cash impairment charge related to the write-down on the carrying value of our equity investment in CareerBuilder totaling $123 million ($76.8 million after-tax);
- Severance charges totaling $3.9 million ($2.3 million after-tax);
- Non-cash write-down of inventory totaling $2.0 million ($1.2 million after-tax);
- Costs associated with reorganizing sales and other operations totaling $0.4 million ($0.2 million after-tax);
- Gain on real estate transaction offset by charges associated with relocations of certain operations totaling $0.2 million ($0.1 million after-tax);
- Costs related to co-sourcing information technology operations and other miscellaneous acquisition related costs totaling $0.3 million($0.2 million after-tax); and
- Net increase in taxes totaling $0.1 million for adjustments of certain deferred tax credits related to tax positions taken in prior years.
Adjusted net loss, which excludes the items above, was $14.5 million. Adjusted EBITDA1 was $23.1 million in the first quarter of 2017, down 25.1% compared to the first quarter last year. Operating expenses were down 6.1%, while adjusted operating expenses, which exclude non-cash and certain other charges, were down 4.4% in the first quarter of 2017 compared to the same quarter last year. (A discussion of our non-GAAP measures and the reconciliation to the comparable GAAP measures are provided below.)
1 The company early adopted ASU 2017-7 which allows for the classification of pension expense as a non-operating item. See the discussion of non-operating and non-cash pension costs included in the computation of adjusted EBITDA.
Other First Quarter Business and Recent Highlights
Real Estate Transactions:
In the first quarter, the company announced that it entered into an agreement to sell and lease back the Sacramento, California, land and buildings, which is expected to close in the third quarter of 2017, subject to customary closing conditions. The sales agreement for the Columbia, South Carolina land and building which was announced simultaneously with the Sacramento property was terminated during the first quarter. The Columbia, South Carolina property is being marketed for a sales-leaseback transaction under the same terms as the previous transaction.
In April, the company entered into a sales agreement for the Kansas City, Missouri downtown office facility. The sale is expected to close in the third quarter of 2017, subject to customary closing conditions. The company continues to market the Kansas City, Missouri production facility for a sales-leaseback transaction and has received interest in both the Columbia and Kansas City properties.
On March 31, 2017, the company completed the sale of the San Luis Obispo, California, building and land for $9.0 million.
As previously reported, the company acquired The Herald-Sun in Durham North Carolina, on December 25, 2016. The purchase price was not disclosed, but after revenue and expense synergies, the acquisition is expected to be deleveraging to the company.
The owners of CareerBuilder remain committed to the strategic review of this valuable business, which may include a range of possible outcomes. Throughout the first quarter of 2017, the owners of CareerBuilder reviewed several potential strategic outcomes. In March, the range of possible outcomes was narrowed and McClatchy determined there was sufficient indication that the carrying value of its investment in CareerBuilder should be reviewed for impairment. As a result, the company recorded an estimated non-cash impairment charge of approximately $123 million in the first quarter of 2017 using McClatchy’s best estimate of fair value at this time. The value of the company’s investment and other balances reflect only McClatchy’s estimated value and should not be perceived as indicative of a potential strategic outcome or the level of values recorded by other owners. The company expects the strategic review of CareerBuilder to continue and has no estimate of timing on the completion of the process.
Debt and Liquidity:
Debt at the end of the first quarter 2017 was $873.7 million. The notes due September 2017 had a principal balance of $16.9 millionoutstanding with no other maturities coming due until December 2022. The company finished the quarter with $23.8 million in cash, resulting in net debt of $849.9 million. In addition, the Company has a $65 million revolving line of credit available for liquidity if needed.
The leverage ratio at the end of the first quarter under the company’s credit agreement was 5.44 times cash flow (as defined) compared to a maximum leverage covenant of 6.0 times cash flow. The company expects its current deleveraging strategies to reduce this ratio over the course of the year.
Looking to the second quarter and the remainder of 2017, the company reiterates the outlook provided in February 2017. The company expects to grow digital-only advertising revenue at a double-digit rate for all of 2017, improving on the full-year trend seen in 2016. The company expects to obtain the digital growth through organic investments in digital solutions like exceleratetm, as well as other digital products and partnerships.
Expenses are expected to include an estimated $10 million investment in exceleratetm throughout 2017, providing it with a larger sales force and with tools to drive revenue results in McClatchy’s markets, as well as adjacent markets. Management also sees further potential in its video portfolio as well as Nucleus, which is expected to help drive results for larger retailers and national accounts.
While the company believes in the value of print advertising, the declining trends in print advertising are not anticipated to subside in the remainder of 2017. Management believes that print advertising will continue to become a smaller portion of advertising and total revenue. Audience revenues are expected to be stable in 2017.
Management remains committed to reducing operating expenses and will monitor costs throughout the year to achieve expense performance in line with revenue performance, despite the additional investments we are making in news and sales infrastructures. Strategies to continue our digital transformation and reduce legacy costs, include, among others, moving to regional publishers, centralizing audience functions, consolidating production and other functions and reinventing our newsrooms to have a digital-first work flow. These actions will result in initial implementation costs in the range of $15 million to $20 million, which may include accelerated depreciation and certain other non-cash costs. This compares to similar upfront costs of approximately $40 million in 2016 to further our digital transformation and continue our reduction of legacy costs. As noted earlier, management expects improving performance in adjusted EBITDA compared to the level of decline in the first quarter of 2017.
Management will maintain its focus on monetizing real estate assets throughout 2017 with the goal of realizing approximately $100 million in proceeds in 2017. The proceeds achieved from the real estate transactions and cash from operations will be utilized to de-lever the company through debt reductions and further investment in the business.
The company’s consolidated statistical report, which summarizes revenue performance for the first quarter 2017, is attached.