Jul 26, 2008

Great expectations

Earnings expectations are a funny thing.

Imagine I told you you could earn a million dollars a month. The first time that million dollar check arrived you would feel jubilant.

Fast forward a year. Imagine I told you that you can expect to earn $800,000 a month from now on. Well, you're living a million-dollar-a-month lifestyle. The first time the smaller check arrived you would feel disappointed.

Do you start cutting back? Do you fire the charwoman and start filling your Bentley with mid-grade gasoline?

Fast forward a couple months and imagine your surprise when the check amount turns out to be a mere $750,000.

Do you panic? Do you sell the scrap gold? Is this (gulp) the end?

From the outside looking in, $750,000 still seems like a shitload of money - something most of us could get real comfortable living on. But expectations change the whole equation. Where I see three-quarters of a million dollars, Mr. Million and his debtors see a 25 percent loss.

All of which leads me to Alan Mutter's Friday posting about the likelihood of more newspaper jobs cuts. Mutter analyzes the recent earnings reports of six major publishers and finds that revenues are off by an average of 9.4 percent. Worse, operating profits are down an average of 25 percent. All of this despite sharp cost cutting at most of the papers, including cuts to the newsroom (which, some might argue, plays a role in dwindling profits).

However, Mutter also provides this important context regarding expectations:

When you look at the actual business of running newspapers, however, it is notable that the average operating profit among the six publishers is 18.5%, as measured by earnings before interest, taxes, depreciation and amortization (EBITDA). For all that ails the industry, this surpasses the EBITDA of such companies as Chevron (18.7%), Boeing (11.2%), Wal-Mart (7.7%) and Amazon.Com (6.0%).

If publishers, their shareholders and lenders were wiling to accept significantly lower levels of profitability in the future, then further cuts would not be necessary in staff, newshole, circulation and certain other variable expenses. If this were not the case, which it likely will not be, then more cuts would seem to be on the way.


Anonymous said...

There's a kind of method to the madness of investors. Rather, there's a madness to the method of investors. The most basic logic underpinning investment decisions is: How much will the corporation grow (revenues, profits, market share) in the next quarter or the next year?

It's not about the profitability of the business. It's how much the profits can grow consistently.

A business has to be more profitable this year than last year. Next year, it has to be more profitable than this year.

If it's not, the investors stop buying into the company and the value of the business plummets.

Gary, the article is correct in pointing out that newspapers enjoy robust profitability. The problem is, investors will not touch newspapers because they are not showing signs of growth.

Journalists should talk more with people on the business beat, or do some basic personal investing research. They'll get a better grasp of the crisis in media.

Journalists ponder what is the future of news, but it's not going to be the journalists who decide the future of journalism. It'll be the people in the finance office.

Gary Scott said...

No question the financial troubles facing newspapers are more complex than my thought experiment would imply. Indeed, I simply wanted to show how "still making a profit" can look completely different depending on where you sit.

It would be unfair to extrapolate from this one post that journalists generally are financially illiterate. Being frustrated isn't the same things as being ignorant.

Finally, it is quite true that journalists aren't the ones who should be trying to figure out how to make profits. However, it is just as true that the finance office shouldn't be trying to figure out the future of journalism.