Friday, July 27, 2012

Kansas City Star headed toward paywall, meter system

McClatchy, owner of the Kansas City Star, is following the trend and setting up a metered system paywall at its daily newspapers, including the Star, with all of them set to begin by the end of the year. The news release is printed below.

The McClatchy Company (NYSE: MNI) today reported net income in the second quarter of 2012 of $26.9 million or 31 cents per share.  In the second quarter of 2011 the company reported net income of $4.9 million or 6 cents per share.
Revenues in the second quarter of 2012 were $299.3 million, down 4.8% from the second quarter of 2011. Advertising revenues were $222.6 million, down 5.7% from 2011, and circulation revenues were $63.6 million, down 2.4%. Total digital advertising revenues grew 4.9% in the second quarter of 2012, with digital-only advertising revenues up 16.8% from the 2011 quarter. Digital advertising represented 22.5% of total advertising revenues compared to 20.2% of total advertising revenues in the second quarter of 2011.
Results in the second quarter of 2012 included the following items:
  • Accelerated depreciation totaling $2.2 million ($1.3 million after-tax) primarily related to relocating our Miami newspapers' operations.
  • Severance and other restructuring charges totaling $1.3 million ($0.8 million after-tax) related to continued restructuring of the company's operations.
  • A gain on the extinguishment of debt totaling $1.7 million ($1.0 million after-tax) related to debt reduction in the quarter.
  • Reversal of non-cash interest expense totaling $7.8 million ($4.8 million after-tax) related to the release of tax reserves.
  • A favorable adjustment to net income totaling $7.0 million for a tax settlement related to state tax positions previously taken.
Income in the second quarter of 2012, excluding the net impact of these items, was $16.1 million compared to income in the second quarter of 2011 adjusted for similar items of $9.0 million. (Non-GAAP measurements are discussed below.)
Operating cash expenses, excluding charges associated with restructuring plans, declined $6.6 million, or 2.9%, from the 2012 quarter. Operating cash flow, a non-GAAP measure, was $75.1 million in the second quarter of 2012, down 10.0%.
First Six Months Results:
Net income in the first half of 2012 was $24.8 million, or 29 cents per share. Net income in the first half of 2011 was $3.0 million, or 3 cents per share. 
Revenues in the first six months of 2012 were down 4.9% to $587.6 million compared to $618.0 million in 2011.  Advertising revenues in the 2012 period totaled $432.3 million, down 6.2%, and circulation revenues were $130.0 million, down 1.0%.
Results in the first half of 2012 included the following items:
  • Accelerated depreciation totaling $4.2 million ($2.5 million after-tax) primarily related to relocating our Miami newspapers' operations.
  • Severance and other restructuring charges totaling $3.4 million ($2.0 million after-tax) related to continued restructuring of the company's operations.
  • A gain on the extinguishment of debt totaling $6.1 million ($3.8 million after-tax) related to debt reduction in the quarter.
  • Reversal of non-cash interest expense totaling $7.8 million ($4.8 million after-tax) related to the release of tax reserves.
  • A favorable adjustment to net income totaling $7.0 million for a tax settlement related to state tax positions previously taken.
Income in the first six months of 2012 excluding the net impact of these items was $13.6 million compared to earnings in the first six months of 2011 adjusted for similar items of $5.7 million. (Non-GAAP measurements are discussed below).
Management's Comments on Second Quarter Results:
Commenting on McClatchy's second quarter results, Pat Talamantes, McClatchy's president and CEO, said, "Advertising revenues were down 5.7% in the second quarter.  Despite economic headwinds, we were encouraged to see sequential improvement in advertising trends in the second quarter compared to the first quarter of 2012 when ad revenues were down 6.8%. Not only did we experience calendar switches for certain holidays, but we continue to see the trend of advertisers consolidating their marketing budgets around specific holidays. This was evident in the second quarter around the Easter, Mother's Day and Fourth of July holidays, with the impact clearly evident in the revenue results in each month. Advertising revenues were down 8.2% in April, 0.5% in May and 7.9% in June.
"Revenue from our digital initiatives continues to grow at a very healthy rate.  Digital-only advertising revenue increased 16.8% in the quarter with retail and automotive fueling the performance.  Total digital advertising, which includes digital advertising both bundled with print and sold on a stand-alone basis, increased 4.9% compared to the 2011 quarter.  Total digital advertising now represents 22.5% of McClatchy's total advertising revenue compared to 20.2% in 2011.  Our digital traffic also grew in the quarter with daily average local unique visitors to our websites and mobile content up 2.1%.
"Beginning this month, we also launched in a few select markets a suite of online products that is designed to offer local businesses a comprehensive digital marketing solution. This product suite, impressLOCAL™, provides affordable packages that include website customization, search engine marketing and optimization, social media presence and marketing services, as well as branding opportunities on the web through mobile and e-mail campaigns. Early sales efforts have been very positive, and we plan to roll out these packages to all of our markets by early 2013.
"Direct marketing advertising continues to perform well; ad revenues in direct marketing products were up 1.8% in the second quarter of 2012, marking the ninth consecutive quarter of growth in this category.  Through June 2012, advertising in direct marketing products made up 13.7% of our total advertising revenues and when coupled with digital advertising, 36.0% of our advertising revenues were generated outside of the daily newspaper.
"Circulation revenues decreased in the quarter, down 2.4%. Daily circulation volume declined 6.0% while Sunday was down 5.2%.  We faced a difficult comparison this quarter compared to the second quarter of last year especially in Sunday single-copy sales, which were driven by strong interest in couponing that spurred Sunday circulation growth in 2011.  
"While circulation revenues and volumes showed declines in the second quarter, we are focused on developing strategies to generate additional subscription revenues and improve circulation volumes at our newspapers.  We recently completed an exhaustive study of circulation practices across our newspapers, and have begun implementing policies across the company to improve both print circulation volumes and revenues.
"We are also offering new subscription packages to our readers. After a number of experiments and analysis on pay models, we intend to roll out a metered plan in the third quarter in five of our markets.  We will offer readers a combined print and digital subscription package that will include access to web, certain mobile and replica editions for a relatively small increase to print home-delivery rates. We'll also offer online-only digital subscriptions to users after they read a certain number of pages. Once the first wave is launched, we intend to expand this model to our other markets beginning in the fourth quarter of this year. 
"Cash expenses, excluding restructuring costs, were down 2.9% in the quarter. We continue to carefully balance expense management with strategically investing in our products and doing so enabled us to generate another quarter of healthy operating cash flow.  As was the case throughout the recession, all of our papers remain profitable and all continue to publish daily, providing communities with needed news and information in whatever form they wish to receive it.
"Our share of income from all equity interests was $9.3 million in the second quarter of 2012.  McClatchy's investments, particularly our digital investments, are consistently producing strong results which speak to the staying power of the underlying products. They are strategically important to our newspaper websites and we continue to work closely with these companies to maximize financial and operational performance.
"Looking forward, we continue to see a very choppy economic recovery that is affecting our advertising customers, and therefore our visibility into our own advertising revenues.  We will continue to focus on our strong and growing set of products and revenue initiatives, especially in digital and direct marketing. We will carefully balance expense management with strategically investing in our products. We expect to continue to benefit from stability in newsprint pricing, recognizing that comparisons to 2011 get tougher in the third quarter even in a soft newsprint pricing environment. On balance, we expect cash expenses to be down in the low-single-digit percent range in the third quarter of 2012."
Elaine Lintecum, McClatchy's CFO said, "We reduced debt by $35.0 million in the second quarter to $1.564 billion and finished the quarter with a cash balance of $37.7 million. Our nearest-term maturity in November 2014 is approximately $66 million – not an issue given our free cash flow. Our leverage ratio at the end of the second quarter as defined in our credit agreement was 4.57 times cash flow and our interest coverage was 2.24 times."
Lintecum also said, "We also have good news on the pension front. New pension funding legislation signed into law in July as a part of the highway bill values pension obligations using normalized long-term bond yields rather than the unprecedented low rates we now see for long-term bonds. We believe this is a more appropriate valuation of pension obligations and expect the company's annual required pension contributions for at least the next two years will decline. We expect the new legislation will reduce our funding from about $78 million for 2013 and 2014 combined, to approximately $10 million in 2013 and $25 million in 2014, allowing us to focus more cash on debt repayment."
Non-GAAP Financial Measures:
In addition to the results reported in accordance with accounting principles generally accepted in the United States ("GAAP") included in this press release, the company has provided information regarding operating income, non-operating expenses and income, income taxes, and net income excluding certain items described in an attached schedule. In addition the company has presented operating cash flows (defined as operating income plus depreciation and amortization, restructuring related charges and other non-cash impairments) along with operating cash flow margins (operating cash flow divided by net revenues) that are reconciled to GAAP measures in the attached schedule. Management believes these non-GAAP measures, when read in conjunction with the company's GAAP financials, provide useful information to investors by offering:
  • the ability to make more meaningful period-to-period comparisons of the company's on-going operating results;
  • the ability to better identify trends in the company's underlying business;
  • a better understanding of how management plans and measures the company's underlying business; and
  • An easier way to compare the company's most recent operating results against investor and analyst financial models.
Operating income, non-operating expenses and income, income taxes, and net income excluding certain items should not be considered a substitute or an alternative to these computations calculated in accordance with and required by GAAP.  In addition, operating cash flow and operating cash flow margins should not be considered replacements for cash provided by operating activities as shown in the company's statement of cash flows included in our financial statements.

1 comment:

  1. Anonymous7:33 PM

    The Star, of course, has never been the same entity since it first entered the dark, dreary world of corporate ownership back in 1977, at which time it could still be read twice a day (The Times in the morning and The Star in the afternoon). Any of us who have ever had any sort of a connection to the newspaper industry are quite familiar with the primary factors affecting the viability of the product. Some adjustments are certainly in order, at The Star and elsewhere, but there's just no excuse for shoddy reporting, even on an occasional basis, poor judgment in terms of what is or isn't news, and, worst of all, arrogance. From my perspective, The Star certainly has room for improvement in at least some of these areas. Rick Nichols.

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