"These are the times that try men's souls," Thomas Paine once famously said. And while the Internet revolution will spill less blood than the American Revolution did, it's still a painful experience for your local newspaper owner. With advertising revenues shifting away to online media, many newspapers are seeing their lifeblood slip away. And for newspaper companies with shareholders, those losses have precipitated a decline in share value.
That's why I was interested in learning how Washington Post (NYSE: WPO ) is dealing with such difficult industry issues. I was able to listen in on the company's presentation at the UBS 34th annual Global Media Conference and Credit Suisse's Media & Telecom Week. Since the Post doesn't provide forecasts or quarterly updates, this was an opportune time for investment analysts and shareholders to hear directly from the CEO about the company's progress.
That man, Don Graham, spent most of the time discussing the Post's four major operating divisions -- education subsidiary Kaplan, cable provider CableONE, broadcast segment Post/Newsweek Stations, and The Washington Post, which includes Newsweek and related websites. A brief Q&A session followed. Graham spoke for a little more than 40 minutes while Jay Morse, CFO, sat in as wingman. Graham started off by outlining management's two major tasks:
- Grow the company's income in a meaningful way for its shareholders.
- Guide The Washington Post through the revolution in advertising media.
Pretty soon, the Post will have to describe itself as an education and media company, instead of the other way around. Now the largest operating segment both in revenue and operating income, Kaplan is quickly become the driving force behind the entire company, and it's also the solution to management's first task to grow income. As Graham noted, Kaplan's success has come quickly -- it had an operating loss in 2001 of $13 million and generated $158 million in operating profits for 2005. Kaplan, which had revenue growth of more than 25% in the past fiscal year, also has the largest growth potential of the four operating divisions.
At $1.6 billion in revenues, Kaplan is quickly approaching the size of publicly traded for-profit education companies Career Education (Nasdaq: CECO ) and Apollo Group (Nasdaq: APOL ) . With the strength the Kaplan segment is showing, and given its strong outlook, the Post has found a meaningful answer to diversifying its income stream.
The Post also generates material income from its cable operation, CableONE, which operates in smaller markets in the South, Southwest, and West. Management believes that by focusing on smaller markets, CableONE can avoid costly competition from telephone and other cable companies. This year, the segment began offering VoIP telephony, and although it's smaller than Comcast (Nasdaq: CMCSA ) and Time Warner (NYSE: TWX ) , it should see its valuation increase with the additional services.
Besides education and cable, the Post also operates six television stations. Although the smallest division by revenues, the broadcasting division still provides meaningful income and generates significant cash flow. Graham, however, admits that this segment faces more risks today than in the past and that the management skills necessary to maintain profitability in this area have increased significantly.
Washington Post, meet Google
Finally, Graham turned the discussion toward the company's namesake, The Washington Post. The company lumps together The Washington Post, Newsweek, and its smaller media assets in this segment, along with the related Internet operations. Graham summed up the current environment in this sector by saying, "I won't lie -- it's been a year of a few pluses and some pretty big minuses." Fortunately, declining advertising revenues in print media have been offset by growth in online advertising. Online advertising at washingtonpost.com generated revenues about 13% of what print advertising generated for the flagship newspaper.
Furthermore, this company's executives, along with leaders at most other newspapers, have decided that if they can't beat the Internet, they'd better embrace it. The company and a group of 50 other newspapers have partnered with Google and its Print Ads program to help drive print-advertising revenues through a new online marketplace. The Google program, along with Yahoo!'s partner program that includes 176 daily newspapers, shows how interrelated the online and offline mediums are becoming.
Whether the Google partnership or the new Post Points loyalty program works is anybody's guess. Graham summed it up with what he thought about the future of the industry: "I don't know. It's changing; it is changing fast."Foolish final thoughts
I admit being surprised at the strength of the Post's diversified operations. Kaplan's meaningful role, which will only grow in the future, is significantly changing the dynamics of this company. Consider that Kaplan and CableONE on a trailing-12-month basis represent 57% of the Post's revenue base and 53% of its operating income. And those percentages will continue to grow if Kaplan continues to leverage its scale into increased operating profits. Even if the education division's growth trajectory is lowered a notch or two, the fundamentals of the for-profit education industry are still much stronger than that of the newspaper industry.
And so far, this diversified plan is working. Although the Post's share price has suffered in the short term alongside media peers Gannett (NYSE: GCI ) and Tribune (NYSE: TRB ) , Washington Post has managed to retain more value over a longer five-year period. With the strength in the company's diversified operations, I wouldn't be surprised if this divergence continues.
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