by Lou Phelps – Phelps, Cutler & Associates
February 28, 2015 – The McClatchy Company announced last week that the company expects to continue its digital transformation and revenue diversification. Nearly two-thirds of its revenues are derived from sources other than print newspaper advertising as of the end of 2014.
In 2015 the company expects to grow digital and direct marketing revenues, as well as other non-traditional revenues, and expects newspaper print advertising to be a smaller share of overall advertising because of expected double-digit growth in digital-only advertising revenues and solid performance in both direct marketing and audience revenues.
Audience revenues were $95.5 million, up 5.2% from the same quarter in 2013 and were down 0.3% for the quarter excluding an increase of $5.0 million in revenues related to the transition to fee-for-service audience delivery contracts at certain newspapers.
The monthly unique visitor count finished the quarter up 2.9% compared to the same quarter last year. For all of 2014 unique visitors grew 13.7%, a level that was achieved despite the lowering of the current free view limitation for desktop readers down to five news stories from 15 stories at the end of 2013. Mobile users continue to grow and represented 50.0% of total monthly unique visitors in the quarter.
On the expense side, McClatchy said the company will also focus on reducing legacy costs tied to its print newspaper products in 2015, primarily production and distribution expenses. Management expects that even with higher pension costs, investments in new digital products, enterprise-wide computer systems, and approximately $9 million in additional Cars.com expenses as a result of the company’s new Cars.com affiliate agreement, the reductions in legacy costs will help to stabilize cash flow over the course of 2015.
Total cash expenses excluding unusual items are expected to decline in the low single-digit range from 2014, and to be reduced further if needed based upon the revenue environment.
The company expects 2015 to be another year of continuing improvement in the company’s financial condition, with $40 million less in interest costs compared with 2014. The company expects no required pension plan contributions in 2015 and anticipates about $20 million in capital expenditures next year.
In connection with the recent sale of McClatchy’s interest in Cars.com equity investment, management is performing a review of its digital agreements related to the sales of third party digital advertising products to identify whether the revenues from the sale of such products and services should be reported gross, with wholesale fees paid to the third parties reported as expense, or reported as net revenues. If reported as net revenues, the wholesale fees paid to third parties are recorded as a reduction of the associated revenues. Neither method of reporting has any impact on the company’s operating income, operating cash flows or earnings. The company expects to complete this review before it files its Form 10-K with the Securities and Exchange Commission (SEC) in early March, 2015.
Financial results for 2014 were released, as well. An overview includes:
- Closed on sale of interest in Cars.com; $631.8 million in proceeds net of costs
- Reduced debt by $523 million in Q4 2014
- Revenue categories other than print newspaper advertising over 62% of 2014 total vs. 59% in 2013
- Audience revenues grew 5.2% in Q4 2014 compared to Q4 2013 quarter
- Digital-only advertising revenues, excluding Apts.com revenues, up 6.3% compared to Q4 2013 quarter and up 10.6% for full year 2014 compared to full year 2013
Adjusted net income from continuing operations in the fourth quarter of 2014 was $11.0 million, compared to $29.4 million in the fourth quarter of 2013.
Firt term lien debt has been reduced significantly and outstanding debt now stands at approximately $1.0 billion.
According to Pat Talamantes, McClatchy’s president and CEO, “We took strategic monetization actions in 2014 that are having an immediate impact on our company and will benefit us well into the future. Funds received from the monetization of our investments in Apartments.com and Cars.com, along with our sale of the Anchorage Daily News, were put to work in the fourth quarter of 2014 to reduce approximately $523 million of our outstanding debt. Cash interest expense will be down by about $40 million in 2015 due to the recent debt reduction efforts.”
Talamantes continued, “Operational results in the fourth quarter were hampered by the continued sluggishness in the print retail environment and also reflected a difficult comparison to the 2013 fourth quarter, our strongest quarter for revenue performance in 2013. Additionally, national advertising remains a challenging category across the industry for regional newspaper companies. Digital advertising and audience revenues continued to grow: total digital-only advertising revenues, excluding the impact of selling Apartments.com in April of 2014, grew 6.3% in the fourth quarter and 10.6% for all of 2014 compared to the same periods in 2013, and audience revenues were up 5.2% in the fourth quarter. Together with direct marketing and other non-traditional revenues, revenue categories other than print newspaper advertising accounted for over 62% of our total revenues for all of 2014 compared to 59% in 2013.”