McClatchy Struggles As Ad Revenues Drop 30%

Nearly seven large US newspapers have filed for bankruptcy in the past five months, making it clear that the industry is finding it extremely difficult to sustain its business model or find a new one as the recession continues to eat away at its main revenue source, advertising. McClatchy (NASDAQ:MNI), the third-largest newspaper company in the US, doesn’t seem to be in any better a position than its peers.

Q1 revenues fell by 25% over the year to $365.6 million and McClatchy netted a loss per share of $0.45 compared to a loss of one cent per share a year ago.

As expected, advertising revenues were the biggest contributor to the decline as they fell nearly 30% over the year and contributed $284.7 million to the quarter’s revenues. Within advertising, however, digital advertising managed to increase its contribution to revenue to 15% from 12% in 2008. Yet, digital revenues fell 4.7% over the year. The reduction in employment advertising was the biggest contributor to this decline. Average monthly unique visitors to the company’s websites grew 27% during the quarter.

Surprisingly, circulation revenues stood their ground and managed to gain nearly 1% over the year to contribute $68.5 million to the quarter. During the quarter, McClatchy increased circulation prices at various newspapers, contributing to the minor growth of circulation revenues despite a 9% fall in circulation volumes.

In addition their financial performance, McClatchy is getting caught in some legal issues. They recently received a notice from the NYSE for having missed a few regulations relating to delisting requirements. Additionally, they are struggling with their financial leverage. They are still sitting on a debt of $2.02 billion at the end of the quarter, which analysts feel will cause them severe heartburn in the coming quarters. Financial leverage in the quarter stood at 5.9 compared to the permitted 7.0 while the interest coverage ratio stood at 2.8, significantly higher than the required 2.0.

As of now, management seems to be following a survival strategy of controlling costs and managing debt. Their earlier launched cost control measures reduced expenses by nearly 18%. However, given their current situation, the company needs to control these expenses even more. They have already frozen pension plans and temporarily suspended their contribution to employees’ 401(k) plans but are hopeful of resuming contributions by 2010.

To manage their debts, McClatchy proposed paying only $0.20 per dollar to the $1.1 billion owed to unsecured lenders. If these lenders refuse the offer, they will be the last in line to get any funds should McClatchy file for bankruptcy.

As of now, McClatchy just needs to wiggle their way out of the current turmoil. Unlike others such as Murdoch’s Wall Street Journal, they don’t have content that can command a fee for access.

Their stock is trading $0.64 with a market capitalization of $54 only million. The stock has risen significantly after nosediving to record lows of $0.35 a couple of months ago.