by Paul Ginocchio, CFA, DeutscheBank
To help us formulate an outlook for 2007, I recently spoke with senior executives from 14 privately held newspaper companies. These executives own or manage approximately 220 daily newspapers (about 15% of total US dailies) with a combined circulation of nearly 6.8 million (13% of US daily circulation).
This group of executives is looking for average ad revenue growth of 1% to 2% in 2007, versus an expected 0% to 1% in 2006. The executives expect improvements in auto, retail and national, which they believe will more than offset a substantial year-over-year deceleration in real estate, and lukewarm recruitment advertising.
As a comparison, we (Deutsche Bank) are looking for an industry-wide ad revenue decline of 0.5% in 2007 versus flat year-over-year growth in 2006.
The majority of operators we spoke with also believe they will see operating profit growth in 2007 versus a decline 2006. The driving factors in projected operating profit growth (in addition to revenue growth) are falling newsprint (and energy) prices and expected FTE reductions.
All of our respondents believe that newsprint prices will be flat or down in 2007. Among those that think prices will fall, the expected decrease was $50/metric ton, with a range of $25/ton to $100/ton.
Here is a summary by category of the forecast for revenue trends in 2007.
Retail. Our private company executives expect, on average, for retail (local) ad growth to improve in 2007 relative to 2006. Based on NAA data through three quarters and our 4Q industry-wide estimate, we believe 2006 retail growth will be approximately flat.
None of the respondents thought retail growth would exceed 2.0% in 2007, and most felt it would be close to flat. Deutsche Bank is estimating flat trends.
National. Private company executives in general thought that it would remain erratic in 2007: “rollercoaster,” “your guess is as good as mine,” “big unknown.” Overall though, there appears to be guarded optimism about the category going into 2007. Deutsche Bank is estimating low-single digit declines.
Auto Classified. Most of the executives said they expect auto to be weak in 2007, but better than the significant declines experienced in 2006 and 2005, though a couple of executives were more pessimistic and foresaw tough times again: “Don’t know where the bottom is for auto.”
Several execs said November and 4Q have trended better than the first three quarters, and they expect a similar improving trend (but still negative year-over-year) to continue in 2007. A key unknown is Ford’s dealer consolidation goals, which were announced in August 2006. Deutsche Bank is estimating low-single digit declines.
Recruitment Classified. This category had a strong 2005 (+12%), but a surprisingly weak 2006 (we estimate -6%, after expectations of positive growth at the beginning of the year). There is a lot of uncertainty regarding the vertical due to economic uncertainty and a changing competitive landscape.
Among the executives with whom we spoke, a roughly equal amount said recruitment advertising growth would be better/same/worse in 2007 versus 2006. Deutsche Bank is estimating low-single digit declines in help wanted classified advertising.
The biggest expression of optimism surrounding help wanted advertising came from operators who either were newly affiliated with a major national recruitment network (either Yahoo! HotJobs or Monster), or were close to a deal with one of those two networks.
Real Estate Classified. While the auto and help wanted verticals appear to have a lot of uncertainty, there is near unanimity among the private companies that real estate advertising growth will be worse in 2007 than in 2006. One executive stated that real estate trends made him feel like a “bull rider.” Deutsche Bank is estimating mid-single digit declines.
Online Advertising. Despite very strong online ad growth in 2006 (we estimate about 30% for the industry but 40%+ for our surveyed executives), our pool of private company executives foresee even more robust online ad growth in 2007.
Twelve of the 14 respondents (one did not say) thought that their company would see interactive growth at least equal to 2006, and eight believed that growth would accelerate.
Circulation. Most of the operators anticipate circulation volume to be flat to down 2% in 2007, slightly better than 2006 (industry-wide average will be about -2.5% this year). Based on the comments of these executives, we think the underlying industry-wide rate of daily circulation decline is around 2%.
The key industry “headlines” these executives expect in 2007: 1) more newspaper M&A, 2) potentially one more public newspaper company going private (beyond Tribune), 3) more deals between newspapers and internet companies (e.g., Yahoo! HotJobs, Google, and Monster deals), 4) more newspaper industry collaboration, and 5) more outsourced printing (particularly where printing operations are unionized).
To conclude, I think the public markets are trying to gauge when (if ever) the newspaper industry turns the corner and starts to produce positive operating leverage (rising margins on growing revenue).
The question in our mind is: if the structural decline in print revenue is (say) 2% to 3%, what kind of online revenue growth do the publishers need to offset about 2% growth in costs? Simple math suggests the industry needs online growth to remain 25% annually for several more years to gain the online scale (perhaps 20% of total revenue) necessary to offset the print declines.
This revenue mix would produce just over 2% overall revenue growth, allowing positive operating leverage. Based on current growth trends though, the newspaper industry likely won’t have 20% ad revenue exposure to online until 2010 or later.
We think newspaper execs finally faced up to this fact in 2006, which may have been the stimulus for the current wave of deals with Yahoo! et al. We expect 2007 to be full of announcements as the shape of these alliances emerges.