Tribune’s publishing revenue is declining in line with (or faster than) the rest of the newspaper industry. Tribune hasn’t been cutting costs as fast as its competitors, however, so its operating income is falling much faster.
This highlights another problem that newspaper managers and investors should be hyper-focused on: Thanks to high fixed costs, revenue declines are greatly magnified on the bottom line. At Tribune publishing, for example, Q2 revenue declined 9% year, but operating income declined 20%:
TRIBUNE PUBLISHING Q207 Q206
Revenue $920 $1,016
Y/Y Change -9%
Operating Profit* $200 $250
Y/Y Change -20%
Margin 22% 25%
*Excludes business closure charges of $53 million
Expressed differently, Tribune’s publishing business loses about $0.50 of operating income for every $1.00 of revenue decline. That may not sound bad, but as revenue shrinks, Tribune’s economies of scale will decrease, and the company will lose even more–forcing even more drastic cost-cutting. Even at the current contribution margin, moreover, an additional 40% drop in Tribune’s revenue would wipe out its cash flow.