Last Friday, the Newspaper Association of America released its 4Q07 and full year 2007 advertising expenditure data. Not surprisingly, the NAA titled its press release, “Online Advertising Jumps 19 percent in 2007.” The only problem with headline is that online advertising represented just 7.5% of all newspapers ads last year. Print advertising, which represents the other 92.5%, fell 9.4% last year, bringing total newspaper advertising to a decline of 7.9%.
Among the major ad categories, retail, the largest category representing half of print ads, faired the best, falling 5%. National ads, about 17% of total ads, fell 6.7%. The big damage was in classified advertising, largely a local business, which had a massive decline of 16.5%.
Classified advertising is composed of automotive, real estate, help wanted, and other. The news is the first three categories is terrible. Auto fell 18.3%, real estate fell 22.6%, and help wanted fell 19.8%. Auto fell for the fourth straight year with each year’s decline larger than the last. This category clearly is facing secular challenges. Real estate had been a strong growth category prior to the subprime mess so while it also faces secular share loss tot the internet, it should return to growth when real estate markets improve. Help wanted also has a significant cyclical element although the secular challenge is real. 2007 marked the second straight year of declining help wanted advertising.
Quarterly trends show little hope….
https://dev.northlakecapital.com/wp-content/uploads/2026/02/nl_logo.gif00Steve Birenberghttps://dev.northlakecapital.com/wp-content/uploads/2026/02/nl_logo.gifSteve Birenberg2008-03-31 16:27:172008-03-31 16:27:17Newspapers Final 2007 Data As Ugly As Expected
The upfront TV advertising market will kick off in May as usual despite dire protestations during the writer’s strike that it would be a casualty of a new post-strike business model for broadcast and cable networks. NBC is saying it will not participate as usual but all the rest of the major broadcast and cable networks plan the usual lavish rollout of shows scheduled for the fall TV season followed by negotiations with advertisers and media buyers. Some of the major cable networks, including Time Warner’s TBS and TNT, plan to rival ABC, CBS, FOCX, and NBC by matching the traditional broadcast approach to the upfront. With most cable channels increasingly relying on original productions and cable ratings still gaining on the big four networks, this is not surprising.
What might be surprising is that the upfront is generally expected to quite strong. Advertisers and TV networks both except a significantly higher level of spending this year than the past few years. This is expected to occur despite (1) another year of terrible ratings for the broadcast networks that was exacerbated by the writer’s strike and (2) continuing controversy over the impact of DVRs.
A strong upfront is the result of a couple factors. First, advertisers are expected to buy a meaningfully higher percentage of inventory this year than the past two years. For two straight years, advertisers made fewer commitments in the upfront and then ended up paying big premiums, often as much as 20%, for similar advertising time one the season had started in what is known as the scatter market. The fact that scatter is receiving premium prices because advertisers are bidding aggressively to make up shortfalls in ratings is ironic but it is reality to the broadcast and cable networks which benefit. The impact of scatter can also be negative so if advertisers cancel upfront commitments or ratings are especially poor, it is possible that a weak scatter market will offset a strong upfront.
The second factor supporting the upfront is the shift in advertiser budgets toward national advertising at the expense of local advertising and the fact that TV remains the only and best place to reach a mass audience. The internet is clearly attracting the bulk of dollars shifting from local to national but TV remains an attractive buy for advertisers and its piece of the share shift is enough to keep broadcast TV advertising fundamentals healthy even as ratings suffer at the hands of cable networks and DVRs.
Before getting handle on which companies could benefit from a strong upfront, let’s take a quick look at the growing influence and controversy over DVRs….
https://dev.northlakecapital.com/wp-content/uploads/2026/02/nl_logo.gif00Steve Birenberghttps://dev.northlakecapital.com/wp-content/uploads/2026/02/nl_logo.gifSteve Birenberg2008-03-20 13:43:202008-03-20 13:43:20Previewing The TV Upfront
Catching up some email, I found a couple of interesting pieces on the major media companies from Merrill Lynch analyst and my friend, Jessica Reif Cohen. Back in early March, Jessica noted that as a group the media companies she follows reported 4Q07 earnings ahead of her estimates. Her universe had revenue growth of 15% and EBITDA growth of 12%, ahead of her estimate for 10% and 6%. Jessica’s estimates weren’t far off consensus. Among major companies, Disney and News Corporation easily beat estimates as did Dreamworks Animation. Viacom reported at the high end and Time Warner reported inline. CBS results showed no growth but were close to consensus as well.
In this initial report, Jessica noted that she thought 1Q08 results would be similarly strong but she was worried that this was a “head fake” as media company results tend to lag the economy by a few quarters, especially when the economy has slowed significantly.
I own DIS and NWS on behalf of Northlake clients and even as the I reported favorably on the 4Q results and higher guidance from both companies I was worried that results could slow quickly if not unexpectedly. The fact that DIS and NWS have reported a string of positive surprises but seen their absolute and relative valuations sink to historic lows strongly suggests the market has a similar worry.
With this in mind, I have been on the lookout for any evidence that fundamentals were slowing for the major media companies. Mostly, that means that TV advertising slows. DIS has the added issue of slower sending on vacation travel….
https://dev.northlakecapital.com/wp-content/uploads/2026/02/nl_logo.gif00Steve Birenberghttps://dev.northlakecapital.com/wp-content/uploads/2026/02/nl_logo.gifSteve Birenberg2008-03-19 09:35:522008-03-19 09:35:52Big Media Fundamentals Holding Up For Now
I was quite pleased with the 4Q07 results, 2008 guidance, and conference call from American Apparel (APP), which reported after the close last night. The consensus I was using consisted of just one analyst so it wasn’t really meaningful. Just three analysts asked questions on the call but they were enthusiastic, asked a lot of questions, and seemed very pleased by the answers they were getting. The only meaningful negative in the quarter was the announcement that the company has material weakness in accounting per Sarbanes Oxley. I think this is a routine matter for a newly public company via blank check IPO but some may not like it.
For 4Q07, APP reported revenues of $111.2 million, up 48%. This figure was a little higher than I was expecting driven by the retail business (the company operated 182 stores at year end), where same stores sales rose a stunning 40% in the quarter. Adjusted EBITDA came in at $13.3 million, up 56%. This was slightly short of the $60 million figure I hoped reflecting heavy investment by the company in its transition to public reporting standards and by its commitment to set the stage for America Apparel to be a major global brand with 100s of new stores over the next five years. The company reported a small net loss for the quarter after backing out a tax benefit. I was expecting a small net profit and the difference was due to the higher expenses I just mentioned and greater than expected net interest expense. Overall, I fund these numbers to be excellent for a growth retailer like APP and the analysts on the call all congratulated the company on the results.
APP provided detailed guidance for 2008, pointing to revenues of $470-485 million and EBITDA of $70-64 million, both up 24%, and EPS of 32-36 cents, vs. the adjusted 2007 result of 19 cents. At first I was a bit disappointed that EBITDA and EPS guidance was not higher but on the call it became pretty call that guidance is conservative. First, guidance is based on comps of 15% versus the 2007 figure of 29%. Tougher comps will lead to a slowing but January and February are up 40% and 45%, respectively! Also conservative is the projection for $15 million net interest expense given a total debt level of $117 million and current cash of over $80 million. Finally, at 74 million, the share count is about 4 million ahead of my spreadsheet. I strongly believe APP will easily beat guidance on the revenue, EBITDA, and EPS line in 2008….
https://dev.northlakecapital.com/wp-content/uploads/2026/02/nl_logo.gif00Steve Birenberghttps://dev.northlakecapital.com/wp-content/uploads/2026/02/nl_logo.gifSteve Birenberg2008-03-18 09:32:492008-03-18 09:32:49Good News From American Apparel But Stock Remains Under Pressure
Central European Media Enterprises (CETV) shares have steadied since the sharp fall last week following announcement and pricing of their convertible deal. The timing on the convert was terrible coming in the midst of the market’s meltdown. I think the fact that it included a complicated capped call transaction made folks shutter as complicated is a bad word in securities these days. The capped call requires use of about 13% of the deal size to purchase calls which will eliminate dilution between the conversion price of $105 and $151. According to management, essentially they converted a 3.5% up 25% convert into a 7.2%, up 80% convert. I trust these guys deeply so I’ll accept that this was best way to raise money for buying out their partners in Ukraine and reloading for future deals including a rumored entry into Turkey.
After the close on Tuesday, CETV CEO Michael Garin presented at a Bear Stearns conference. I listened to the webcast and came away with these observations which are incremental to what I feel is a deep knowledge of this company:
(1) Garin said CETV would double through organic growth in “4 or 5 years.” Might be minor but the official guidance on this measure issued just two weeks ago is five years.
(2) Garin noted that CETV knows 80% of their revenue by the end of March and though it has not happened in the company’s history if there were a shortfall they had nine months to adjust their cost structure.
(3) Regarding the convert, Garin noted the goal was to have two years of “activity” on their balance sheet. He said this required them to do a $400 million deal. The bankers came up with the idea to raise it to $475 million so they would have the funds for the capped call.
(4) Just prior to Q&A ,Garin addressed a bearish Merrill report on the company which centered on concerns about Romania’s economy. He said that based on the fact that they have received no resistance to price increases on advertising this year (most of the 2008 ad inventory has been sold since January 1st) they don’t see a problem for CETV. He also said based on their on the ground observations and actual trends they monitor in retail sales, Merrill is wrong about weakening in Romania’s economy. CETV is forecasting local currency of 20-30% for TV advertising i Romania in 2008. Later in Q&A someone asked about Romania and to a room full of laughter, Garin said again that Merrill is wrong. I would add that CETV’s COO is their long-time Romanian partner who is one of the most revered businessman and richest people in Romania. I am very confident that CETV has a better read on Romania than anyone at Merrill Lynch.
(5) Maybe most meaningful, Garin said that if they owned and managed Ukraine last year they would have made $50 million EBITDA instead of the $27 million reported. 2008 will be an investment/restructuring year in Ukraine so I don’t look for much more than 5% EBITDA growth but this comment does give you a sense of the upside in 2009 and beyond.
(6) In response to a question on free cash flow, Garin said they have about $100 million in FCF before capital spending. Capex in 2008 will be about $130 million so no FCF this year but maintenance capex is $65 million and that is where he thought they would be in 2009 when they would be FCF positive after capex again.
Put it all together and CETV remains the both growth stock in traditional media, fully financed, and deeply undervalued.
https://dev.northlakecapital.com/wp-content/uploads/2026/02/nl_logo.gif00Steve Birenberghttps://dev.northlakecapital.com/wp-content/uploads/2026/02/nl_logo.gifSteve Birenberg2008-03-12 14:05:382008-03-12 14:05:38CETV Presents At Bear Stearns Conference
For 2008, I have treated myself to a subscription to SNL Kagan. Kagan is a long-time research firm focusing on media with a great reputation. They don’t care if I mention their research, in fact they encourage it.
This week in their Media Money newsletter, Kagan looks at the windows between movies in theatres and their release to home video and pay-per-view or video on demand. In general, the time between each of these events has been shrinking for the past ten years with acceleration in the past few years. The timing of windows impacts financial results for the studios that make the movies, the theatres that show them, and the cable and satellite companies that show them via PPV or VOD. Now these windows also impact the digital download business which is at its inception but expected to be a game-changer.
According to Kagan, the window between a movie being in theatres and appearing on DVD was 132 days last year. This figure has trended down steadily since 2001 when it was 176 days. The shorter window is due to the explosive growth experienced in the DVD business. Studios wanted to get DVDs on store shelves when their marketing of the film was still fresh in consumers’ minds.
The shrinking window to DVD has also been accompanied by a shrinking window from DVD to PPV/VOD. Last year the DVD to PPV/VOD window was 34 days, down from 58 days in 2000. With cable companies especially wanting to press their VOD advantage vs. satellite, studios are happy to shorten the window to VOD as long as it doesn’t cannibalize the DVD sale and rental business. Lots of commentary and study has been made of this issue and over the past year, and conventional wisdom has settled on the fact that DVDs are not hurt by shorter VOD windows. And even if they are, the impact is small relative to the risk of missing a consumer transition toward VOD and digital downloads. The trend is clearly toward day and date release where a movie goes to DVD, VOD, PPV, and digital download on the same date…..
https://dev.northlakecapital.com/wp-content/uploads/2026/02/nl_logo.gif00Steve Birenberghttps://dev.northlakecapital.com/wp-content/uploads/2026/02/nl_logo.gifSteve Birenberg2008-03-12 08:51:112008-03-12 08:51:11Watching Movie Windows
The weekend box office fell by 33% against what is probably the toughest comparison it will face until May. The box office has now declined for 5 straight weekends but remains up almost 7% year to date. Comps may remain negative for a few more weeks but the rate of decline should moderate significantly. Analyst estimates for 1Q08 box office are in a range from a mid-single digit decline to a small gain. As a result, the slump should not cause estimates to fall and earnings misses. And to reiterate, a single month or even a whole year of bad comps does not mean that the box office is facing secular decline. Ticket sales are stable for the last ten years and we are coming off a two year run of higher box office including the all-time record year in 2007. I am glad I sold Regal Entertainment off its good 4Q and guidance increase but I won’t hesitate to buy it back if the current box office slump leads to another round of “the box office dying” stories. The next big film that could improve the outlook is Horton Hears A Who which debuts this coming weekend.
Separately, last week the Wall Street Journal and SNL Kagan provided an update on the sale of The Weather Channel and the Weather.com website. Apparently initial bids were due last week and might be coming in under the hoped for sale price of $5 billion. Among the bidders mentioned were NBC, CBS, Comcast, and Liberty Media. I’d guess that the Liberty Media interest is probably referencing a bid from Discovery Communications. There is logical reason for each of these bidders to be interested. NBC already operates a weather business that could quickly gain scale. CBS is looking to diversify and like other owners of major market TV stations, they are already providing weather services. Comcast is also looking to beef up its content both online and on TV. Comcast.net is a very heavily trafficked portal and weather is an obvious draw for a company that already reaches 24 million homes with TVs. Discovery is the leading content player focused on non-fiction content. I am not sure how this is going to play out but a $4-5 billion transaction is a big deal for the buyer and will set a standard for valuing cable networks at a time when the business is in the news due to the Scripps breakup, the Discovery recapitalization, and Viacom’s attempted turnaround. Complicating the ability to draw conclusions about cable networks is the fact that Kagan and others believe that weather.com may be as valuable as The Weather Channel. Look for the winning bidder to see their stock price pressured.
The UK newspaper The Observer is reporting that it has seen a new memo outlining possible private equity approaches to Virgin Media. VMED has been a rumored private target for some time and it is generally accepted that private equity made an offer in upper $20s or low $30s over a year ago. VMED is now trading at $14 and the Observer says that a consortium of Providence Equity, Blackstone, Cinven, and KKR is considering a big of $17 to $22. I strongly advocated for management of VMED to take the prior deal and would do the same again. Financing is going to be tricky on this deal unless the PE firms put in a ton more cash than usual. And of course, a memo is far from an offer. As a result if I were long (thankfully I sold my stock at $26 in 2006) VMED and it popped a couple of bucks today, I’d be selling a significant portion of my position.
https://dev.northlakecapital.com/wp-content/uploads/2026/02/nl_logo.gif00Steve Birenberghttps://dev.northlakecapital.com/wp-content/uploads/2026/02/nl_logo.gifSteve Birenberg2008-03-10 15:20:542008-03-10 15:20:54Virgin Media Back In Private Equity Game?
Reuters is reporting that theatre chains representing 40% of North American screens and the major movie studios have finally agreed to a financing plan to upgrade 14,000 movie screens to digital and 3-D capable technology. The upgrade will cost about $1.1 billion or $70,000 to $75,000 per screen. Studios, theatres, and other content providers would pay fees to use the newly installed equipment with the fees being passed through to bondholders that would be financing the transaction. Obviously, the current credit markets might make completing the deal difficult but the stability inherent in the theatre business should make this a low risk transaction. Digital and 3-D upgrades are a win-win for theatre and studio owners. Studios will save on storage and distribution by downloading films to theatres. Theatres will get better quality digital images, have the capability to receive non-movie content that might fill seats during slower times, and most importantly sell 3-D tickets at a premium. The success of the Hannah Montana 3-D film earlier this year at $15 per ticket has studios and theatres drooling. Dreamworks Animation is committed to issuing all of its movies starting next year in 3-D. Ultimately, the impact is going to be marginal in an absolute dollar sense but it will be enough to improve the operating growth profile of studios and theatres. I’ll take incremental growth any place I can get in mature industries.
https://dev.northlakecapital.com/wp-content/uploads/2026/02/nl_logo.gif00Steve Birenberghttps://dev.northlakecapital.com/wp-content/uploads/2026/02/nl_logo.gifSteve Birenberg2008-03-10 15:19:552008-03-10 15:19:55Studios and Theatres Finalize Plans for Digital Upgrade
The Motion Picture Association of America (MPAA) released its package of theatrical market statistics for 2007 last week. Most of the data I have already recounted in my many updates about the box office. However, there is some interesting data, especially as it relates to the major movie studios which are owned by Disney, News Corporation, Sony, Viacom, and Time Warner. The data referencing MPAA members only covers studios owned by these five companies but industry box office data includes all studios and all movie releases.
The MPAA data confirms previous reports that the 2007 domestic box office rose by 5.4% to $9.63 billion. This builds on the 2006 gain of 3.5% which broke a three year slump that saw 2003, 2004, and 2005 box office change by -1.2%, 0.5%, and -4.2%, respectively. Also, as I previously noted, ticket sales were up just 0.3% in 2007 so the domestic box office gain was driven by a 5% increase in ticket prices. The ticket price increase accelerated from 2002 thru 2006 when price increases ranged from 2.2% to 3.8%. In the three prior years, from 1999 thru 2001, ticket prices increased rapidly in the range of 4.9% to 8.3%.
Despite rising ticket prices, total admissions in 2006 and 2007 are almost exactly equal to 1997 and 1998. Admissions are down about 10% from the 2002 peak but ten years of unchanged ticket sales with the last two years up by about 2% cumulatively seriously challenges the myth that the box office is dying. This is a critical conclusion as far as analyzing the prospects for theatre and studio owner stocks.
Last year was also very good abroad as the international box office reached an all-time high of $17.1 billion, up 5%, representing 64% of the worldwide box office of $26.7 billion. International box office has doubled since 2001 with growth every year except 2005. Total worldwide box office has risen in five of the last six years and was 60% higher in 2007 than in 2001. Hollywood studios produce their films for a worldwide audience making the growth in international box office over the past decade another dagger in the myth that the movie business is dying.
Completing the 2007 recap, MPAA produced some other statistics confirming data I have previously supplied. The data shows that 2007’s record box office was driven by blockbuster films. 2007 had 4 $300 million films vs. just 1 in 2006 and 28 films reached the $100 million blockbuster status vs. 19 in 2006. Growth in the domestic box office in 2007 was driven by the record breaking summer. MPAA notes that the top ten summer movies in 2007 grossed 23% more than the top ten in 2006. The next ten were up an astounding 39% but the third ten fell by 25%.
2007 was a blockbuster driven year which is why 2008 faces difficult comparisons which started last weekend and will extend pretty much continuously through summer. This was the main reason why I sold my multi-year long position in Regal Entertainment. I plan to stay on the sidelines until Regal makes a new 52 week low or we learn that this summer’s slate will show better comps than currently expected.
MPAA confirmed one other point I have written about: in 2007, R-rated films did well generating 15% of the total domestic box office, up from 10% in 2005 and 2006. 15% is not an unprecedented level, as it was matched or exceeded in 2003 and 2004, but it does show that records are made when there is depth of interesting movies across all movie going demographics.
The most interesting new data in the MPAA report concerns the cost of making movies and the impact of new media on the movie business. Download file
The graph on the left shows that for major releases by the five MPAA members the cost of producing and marketing a movie grew by 8% last year to $107 million. The major studios are also starting to dominate the independent business. Each major has started its own independent studio, which are competing with the independents traditionally associated with films festivals like Sundance. The graph on the right shows that the costs associated with these films has skyrocketed and is not too far behind the traditional big budget, widely released film. How the studios are coming to dominate the “independent” business is a topic for another column.
Facing rising production and marketing costs, the studios are increasingly turning to outside financing. Unfortunately, this MPAA data excludes the portion of costs that are paid by outside film financing ventures. David Poland, founder of Movie City News and author of the The Hot Button and , estimates that outside financing would push the actual cost up 30%. The idea behind outside financing is for the studio to slice revenue and costs on a film into lots of pieces to increase predictability on their own piece and give outside investors the ability to match their own risk tolerance to the appropriate investment vehicle (insert your joke about the credit crisis here!).
For the studios, it is these costs which really determine the profitability and growth potential of the movie business….
