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Sunday, August 16, 2009

Economy and Creative Destruction Wreaking Havoc On Old Media Biz

On 8/10/09, the E.W. Scripps Company (SSP, $6.55) reported June quarter results. Per the company, Scripps "is a diverse, 130-year-old media enterprise with interests in television stations, newspapers, local news and information Web sites, and licensing and syndication. The company's portfolio of locally focused media properties includes: 10 TV stations (six ABC affiliates, three NBC affiliates and one independent); daily and community newspapers in 14 markets and the Washington, D.C.-based Scripps Media Center, home of the Scripps Howard News Service; and United Media, the licensor and syndicator of Peanuts, Dilbert and approximately 150 other features and comics."

Last summer, on 7/01/08, E.W. Scripps distributed shares of Scripps Networks Interactive (SNI, $33.43) to all shareholders with the idea that the latter would hold cable properties and new media assets. "Scripps Interactive" also reported results last week and "is one of the leading developers of lifestyle-oriented content for television and the Internet, where on-air programming is complemented with online video, social media areas and e-commerce components on companion Web sites and broadband vertical channels. The company’s media portfolio includes: Lifestyle Media, with popular lifestyle television and Internet brands HGTV, Food Network, DIY Network, Fine Living Network (FLN) and country music network Great American Country (GAC); and Interactive Services, with leading online search and comparison shopping services BizRate and Shopzilla."

We could continue with the same tune of our "Tale of Two Auction Franchises" post last May replacing "Auction" with "Media". Both businesses are moving in divergent direction: E.W. Scripps posted 2Q09 revenue down 23% Y/Y to $194 million while the Interactive business posted only a 4% Y/Y decline to $391 million.

Here, we're going to look more closely at the "old" Scripps business -- a quick summary of results:
  • Consolidated revenues were $194 million, down 23% Y/Y
  • Net income from continuing operations, was $2.3 million, or 4 cents per share, compared with a net loss from continuing operations of $608 million, or $11.20 per share, in 2Q08 (reduced by a non-cash, after-tax charges of $583 million).
  • Net debt of $31.2 million, reflecting long-term debt of $73.1 million and cash and short-term investments of $41.9 million.
Revenue from television stations was $61.1 million in 2Q09, down 24% Y/Y percent with category performance as follows:
  • Local, down 26% to $37.3 million
  • National, down 29% to $16.9 million
  • Other, which includes fees for carriage of the stations on cable systems, rose 41% to $6.5 million
  • Political was $333,000, compared to $1.6 million in the 2008 quarter
Revenue from newspapers managed solely by Scripps declined 22% Y/Y to $113 million with advertising revenue down 29% Y/Y to $79.4 million. Advertising revenue by category was:
  • Local, down 28% to $23.6 million
  • Classified, down 39% to $24.1 million
  • National, down 25% to $5.0 million
  • Preprint and other, down 17% to $19.3 million
  • Online, down 25% to $7.3 million
Despite the tremendous Y/Y revenue declines, Scripps management was confident in the company's financial position (balance sheet) and pointed to "slight improvement in the flow of advertising in our markets, particularly at the television stations, which have increased their revenue projections -- albeit very modestly -- during each of the past seven weeks".

Perhaps everyone knows that newspapers are in secular decline as the Internet consumes evermore daily visitors (and hours of media), but we took the above Y/Y decline figures as a sign of just how bad things are in the industry (the negative figures tend to hit readers over the head). In our view, the decline first ignited by technological change is being accelerated by the difficult economy, cementing the newspaper industry as a textbook example of Joseph Schumpeter's creative destruction.

Amidst the challenges, the share price of E.W. Scripps rallied meaningfully over the past month:

Fortunately, the company has a committed, seasoned management team and limited leverage, providing some breathing room to reposition the business. No need, at present, for a quick sale (or giveaway) to XYZ private equity firm (see San Diego Union Tribune and potentially The Boston Globe).

At least two lessons: (1) secular trends typically provide ample notice of where society is headed and usually have long tails (providing many opportunities through time), yet (2) can also accelerate on a dime depending upon surrounding circumstances (in this case, downward). As owner-oriented investors, our goal on the long side is to overweight the uptrends and to preserve capital by avoiding the downtrends. The short side can be used in an effort to capitalize on downtrends, although timing is often very tricky.

Happy investing,

Jeffrey Walkenhorst

Disclosure: none.

© 2009 Jeffrey Walkenhorst
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