Meredith stumbles… but don’t count on it hitting the mat

Meredith Corp has long stood out among not just magazine publishers, but media companies in general, for its unwaveringly conservative, methodical management philosophy. That’s why, writes Karlene Lukovitz, the news around its fiscal year-end results came as a surprise to industry watchers (not to mention Wall Street).

By Karlene Lukovitz

Meredith stumbles… but don’t count on it hitting the mat
Meredith reported its worst stock decline since 1986, coupled with a disappointing forecast…

To crib from Kipling, Meredith has earned a reputation for keeping its head when all around it lose theirs. Over the years, it’s skipped trendy investments in favour of strategic, long-term ones. Meredith focused early (both in-house and through acquisitions) on the database capabilities that have enabled much of its growth and profitability, and has also acquired synergistic assets like the ad-targeting platform MNI Targeted Media.

It also led the way in developing the extremely lucrative branded products revenue channel. Thanks to a long, much-envied relationship with Walmart (3,000 different products) and carefully chosen newer partners (it’s now launching an Allrecipes line of kitchen products with Lifetime Brands), Meredith is a perennial leader in License Global’s annual rankings. This year, it’s ranked #2, with $25.1 billion in licensed product sales – bested only by #1 Disney, with $54.7 billion.

Meredith didn’t “invent” celebrity-branded magazine brands – ironically, Time Inc did, via its partnership with Martha Stewart, and Stewart’s magazine brand is also owned by Meredith now, although not through the Time Inc acquisition. But since buying Every Day With Rachael Ray from Reader’s Digest Association in 2011, Meredith has cleaned up with its Magnolia Journal launch with HGTV stars Joanna and Chip Gaines, and is even now launching a magazine with Drew and Jonathan Scott, stars of HGTV’s Property Brothers.

Meredith has nurtured a diversified portfolio that includes seventeen TV stations, mostly in top-50 US markets, while maintaining a disciplined focus on female audiences within its magazine group, websites, and digital and mobile properties. It boasts that its monthly unduplicated reach to 180 million consumers includes 80% of US millennial women.

Then there’s Time Inc.

It boasts that its monthly unduplicated reach to 180 million consumers includes 80% of US millennial women.

Time Inc acquisition

Meredith coveted People for its large female audience and powerful brand, along with a few other Time Inc brands, like Real Simple. It flirted with Time Inc for years, but true to its sensible Midwestern roots, held out until it calculated that Time Inc could be had for a price ($2.8 billion) that would allow for paying off the debt by selling off unwanted brands, while exploiting the cross-promotional potential of the others to grow revenue and profits.

As we now know, the $2.8-billion deal inked in November 2017 – which was backed by the oil-baron Koch brothers (who, Meredith swore, would not have any influence on editorial decisions) – is at this point looking like a rare but rather massive miscalculation.

To put it mildly, Meredith appears to have underestimated the difficulty of selling – at least for the prices it needed to pay off that debt – those iconic Time Inc brands. Obviously, Meredith was fully aware of the challenges of selling magazines at a time when print advertising and circulation revenue continue to be eroded by the Duopoly and time-suckers like smart phones, streaming and video games. But in addition, Meredith admitted that it somehow misjudged the Time Inc titles’ specific advertising and consumer marketing scenarios.

Last November, a year after the acquisition and nine months after putting four Time Inc brands on the block, Meredith managed to sell two of them: Time to Salesforce CEO Marc Benioff and his wife Lynn for $190 million, and Fortune to Thai businessman Chatchaval Jiaravanon for $150 million. So far, so good. In both cases, the sales were to individuals, not media companies – although the low-profile Jiaravanon owns some media and telecom companies, as well as a variety of other businesses, in Asia.

As we now know, the $2.8-billion deal inked in November 2017 … is at this point looking like a rare but rather massive miscalculation.

Accounting problems

But Meredith missed its own end-of-2018 deadline for selling off the rest of the brands. And in an uncharacteristic, eyebrow-raising development in April of this year, the company disclosed in a regulatory filing that its auditor, KPMG, had uncovered weaknesses in Meredith’s oversight of the processes used to calculate the fair value of Time Inc’s accounts receivable and accounts payable, which were added to Meredith’s books when the acquisition was finalised in January 2018. Although Meredith said its filings fairly represented the results of its operations and cash flows for each of the years in the three-year period ended June 30, 2018, and did not restate its financials, it revised its assurance report from management and the auditor, and said it was implementing changes to its oversight process, reported The Wall Street Journal.

In May, Meredith announced that it had also sold brand and content rights to Sports Illustrated – which had been widely assumed to be the most attractive of the four up for sale – this time to a company entirely dedicated to brand management. Authentic Brands, which owns the rights to fashion and luxury retail brands like Juicy Couture and Judith Leiber and manages the likenesses / images of celebrities including Shaquille O’Neal, Muhammad Ali and Elvis Presley, paid $110 million. That was considerably less than Meredith’s hoped-for $150 million to $200 million – although the deal didn’t include the Fansided blog (still not sold, despite its potential appeal to legal sports gamblers, and described by some as a “content mill”). Meredith reportedly hopes to get some $30 million for that property. Also, for at least two years, Meredith has the right to keep producing the Sports Illustrated print magazine and managing its site and social media, and it’s said to have a profit-sharing agreement with Authentic.

That left the Money brand – which was finally sold in October to Ad Practitioners, a three-year-old, Puerto Rico-based digital start-up with a product review site that’s paid “referral fees” by many of the products reviewed. The price, said to be $20 million, was higher than the $10 million Meredith was seeking before it took the combined and Money magazine package off the market in April and shuttered the 47-year-old print magazine. But it was a decided comedown from “the $400 million-plus the magazine was valued at in the pre-internet era,” and the $47 million in annual profits it was producing as late as 1997, according to The New York Post.

But the Money sale, and the announcement of its Property Brothers magazine launch, were both overshadowed by the lingering effects of Meredith’s fiscal 2019 year-end results, which hit like a bomb in early September.

Meredith missed its own end-of-2018 deadline for selling off the rest of the brands.

Stock decline

Meredith reported its worst stock decline since 1986, coupled with a disappointing forecast. That's despite having cut more than 1,200 jobs, consolidated business operations – not to mention having merged some magazine titles; converted some to low-frequency, newsstand-only publications; eliminated print editions in favour of digital-only for others; and outright folded a few. (In October, it also folded long-ailing, 90-year-old Family Circle.)

While its reported $706 million in adjusted EBITDA for fiscal 2019, which ended June 30, was in line with the guidance it gave in its Q3 results, it was down from an original forecast of $720 million to $750 million. (Lost amid the focus on its big miss on adjusted EBITDA was that its $3.2 billion in revenues actually represented a 40% increase over fiscal 2018 – and included double-digit growth in advertising and consumer revenues. Further, adjusted earnings per share actually increased from $4.67 to $7.24 in the fiscal.)

But analysts also did not react well to Meredith’s forecast for fiscal 2020, which calls for adjusted EBITDA of $640 million to $675 million. Analysts had expected $800 million. In a note to investors, Wolf Research analyst Marci Ryvicker asserted that Meredith clearly “didn’t know what they were buying with Time Inc”.

Its stock, which was already down 16% year-to-date, plunged by 23%, to $33.68, on the day following the year-end report.

Meredith president / CEO Tom Harty – who bought 12,000 shares of Meredith stock to show his confidence in the company after the unexpectedly bad earnings report – acknowledged that, “It’s taken longer than we initially expected to elevate the print and digital performance of the Time Inc assets… It took longer than expected to turn around advertising performance. Additionally, the number of low-margin magazine subscriptions we encountered inside the legacy Time Inc brands were more than anticipated."

Is the unstated implication that Time Inc’s former management somehow managed to disguise some of the titles’ zero- or negative-remit subscriptions? That’s certainly intriguing, given that Meredith is no stranger to discounted subs (it was long known for using the two-for-one offer), and no babe in the woods when it comes to agency-sold subs – not to mention that Meredith acquired one of the nation’s largest sub agencies, Synapse, as part of the Time Inc buy. And given that Meredith is known for not letting sentimentality get in the way of cleaning house when staff – including salespeople – are underperforming or have become redundant, we’re left to wonder what unexpected factors impeded the expected timetable for improving advertising revenue.

Don’t get me wrong: I don’t doubt that Meredith will turn this situation around.

Why? Not only because of that implacable Meredith practicality and resolve, but because of its focus on evergreen, lifestyle content; its commitment to new ventures – including a syndicated People TV show; and its willingness to invest to improve the performance of various properties and spend $50 million on consumer marketing and digital.

For fiscal 2020, Meredith is forecasting between $3 billion and $3.2 billion in revenues (the latter would be flat with fiscal 2019). It expects print advertising to return to mid single-digit declines (better than the magazine industry as a whole), and higher subscription, production and distribution costs. Those two items will equate to hits of $30 million and $40 million on adjusted EBITDA, respectively.

But it also projects digital ad revenue to increase in the mid single digits, for a projected gain of about $15 million in adjusted EBITDA, and to realise about $135 million more in cost savings related to the Time Inc acquisition. (That will bring total savings to $565 million.) Further, it expects to realise another $75 million from additional asset sales, which it will use to pay down its remaining debt.

The smart money is on Meredith rebounding sooner than the sceptics might think.

The smart money is on Meredith rebounding sooner than the sceptics might think.

This article was first published in InPublishing magazine. If you would like to be added to the free mailing list, please register here.