5 Ways McClatchy is a model for a new breed of stand-alone newspaper companies

McClatchy has been a steady presence in the 15 years I’ve been writing about media business with a commitment to serious journalism even while shrinking newsrooms, aggressive digital expansion and continuity of leadership.

Looking at the company’s fourth quarter results Wednesday and listening to CEO Pat Talamantes describe 2015 plans, it occurred to me that McClatchy could now also be a bell-cow for the new generation of spun-off, newspaper only companies.  That group includes Tribune Publishing, early into life on its own after a split from parent Tribune late last year. Later in 2015 Gannett’s publishing division and the merged publishing operations of Journal Communications and Scripps will go that route too.

Here are five ways, McClatchy may be providing a preview:

1. Revenue replacement race: Like other companies reporting in recent weeks, McClatchy had even worse print advertising results than expected, could not make them up with other mostly digital ventures and thus continues to shrink. And having sold its big digital investment in Cars.com — $632 million for a 25 percent share — it has little left in the cupboard. Newspapers, their websites and other digital offerings will need, going forward to get to some organic growth entirely on their own.
2. Little love and attention from Wall Street,: The earnings conference call was lightly attended. As best I can tell, no one but two Sacramento papers and the Charlotte Observer even did a story on the results beyond the press release. Shares were down 7.5 percent for the day, back up some this morning after an announced corporate reorganization. Public company investors are not going to be excited about these companies until there is a stronger revenue trajectory.
3. Cost control matters a lot: McClatchy, like others, declined to offer a forecast for 2015. At a minimum, Talamantes said, he believes the company can further reduce “legacy costs in distribution and production.”  and that will “help to stabilize cash flow in 2015.” But if the year turns sour, more cuts — including more newsroom layoffs — could be in the offing.
4. Profits have a new meaning:  McClatchy has a history of strong operating margins at its 29 properties and that continues. But most of those don’t drop to the bottom line. The cash (and the proceeds of the Cars.com stake sale) largely goes to paying interest and paying down debt. Most of the rest goes to investments in growing digital or new ventures. So for the most recent quarter net income from continuing operations was a scant $11 million on revenues of $317.6 million — a margin of 3.5 percent.

An  analyst asked Talamantes what he would do were the economy go into recession some year in the future, sending ad revenues down 15 to 20 percent.  Talamantes response was revealing:

Where we might see something play out is if we were in a recession that is bad as you are talking about, we might not be in a position to reinvest as much as we have been doing in the last few years. (An) awful lot of our expense reduction has been plowed back into the business to grow our company for the long-term. And so in that situation we might baton down the hatches a little bit more than we have been doing recently. For example, we have a significant video initiative for 2015, where we are growing the business in that category. (In)…that kind of the situation that you are talking about maybe that’s something that gets delayed a little bit.
–transcription from Seeking Alpha

Time for a new generation of digital: Digital subscriptions, website advertising, basic digital marketing services and direct marketing are all maturing businesses.  So what’s next?  Talamantes said:

What we have seen is, we don’t add a lot of value in terms of traditional web hosting services. We do it here and there. We have experimented with it, but it’s not a core component of our offering (to small and medium-sized businesses). Where we are able to leverage our expertise for client is more on helping them identify additional audiences in our markets beyond what’s available on our website. So in terms of reaching viewers on even national websites within our markets we are able to through audience extension products and using programmatic(automated buying) to go out and find additional audiences for them and then presenting that in one tightly integrated package for them. That seems to be where we generate more value and that we add to that we have reputation management products, social media products…

I’ve been asked as recently as this week if there is a breakthrough approach out there for metro and regional newspaper organizations.  Not so much, in my view.  Even as digital transformation accelerates, McClatchy and its new neighbors as stand-alone ventures will be grinding out the details over a period of years.