A New Threat to the Bottom Line

Apr 17, 2006  •  Post A Comment

Just when television station groups thought the arrival of an even-numbered year meant a return to the glory days of robust advertising revenue, they are finding themselves contending with a new threat to their financial results: stock options.

A new accounting rule requiring public companies to book as an expense those stock options and restricted stock options that are issued to employees went into effect at the beginning of the year, and has taken its toll on the first batch of television industry companies to report earnings, in some cases significantly trimming first-quarter profits.

How large an impact expensing stock options took on a company depended on the extent to which stock options were used. At Media General, the hit amounted to around $1.6 million in the first quarter, while Gannett’s stock-option expense for the period was $11.2 million. The New York Times Co.’s stock-compensation expense was $3.7 million.

Tribune’s stock-option expense was $18 million, though the company said it would be significantly less in subsequent quarters because the most recent quarter included stock-option payments to employees who are eligible for retirement, which company officials said had to be expensed immediately.

The idea behind expensing stock options has roots in the early 1990s, but did not become a reality until after accounting scandals at companies such as Enron, WorldCom (which later become MCI before being snapped up by Verizon Communications last year) and Global Crossing. Proponents of expensing stock options argued that executives at these companies were showered with so many stock options that they engaged in shady business practices in order to pump up their companies’ stock price-and thus enrich the executives. By treating options as an expense, the logic goes, companies would use them more sparingly, thus removing a motivation to engage in malfeasance.

Though the stock-option effect wasn’t a surprise, it did appear to compound the somewhat mixed results that the companies reported last week. All four companies are mainly publishing entities that own television stations, and although three of the four reported gains in their broadcasting business, the improvements weren’t enough to overcome challenges on the publishing side, where rising newspaper costs, along with uneven advertising environments, led to results that generally underwhelmed Wall Street.

At Tribune, revenue fell 2 percent to $284 million at the company’s 26 television stations, driven down by lagging performance at the company’s stations in Los Angeles and Chicago, which offset improvements at the company’s station in New York. Also contributing to the results was weakness in the automotive and retail advertising categories. Segment profit for the stations sank 15 percent to $74 million. Overall, Tribune’s first-quarter profit fell 28 percent to $102.8 million, while revenue slipped 1 percent to $1.3 billion.

Gannett’s broadcasting division, which consists of 21 stations plus Captivate, the video service the company sells for use in office buildings, posted an 11 percent increase in revenue to a record $182.6 million, reflecting strong advertising during the Winter Olympics on NBC and higher revenue at Captivate. Excluding Captivate, broadcasting revenue was $177.2 million, 10 percent higher than the 2005 figure of $160.8 million. That helped Gannett earn a profit of $235.3 million, compared with a year-earlier profit of $265.7 million. Revenue rose 6.5 percent to $1.9 billion, driven by a sharp gain in broadcast revenue, which outpaced newspaper advertising and circulation revenue growth.

More Mixed Results

At The New York Times, the company posted a 69 percent decline in first-quarter profit to $35 million, following a year-earlier gain related to the sale of the company’s current headquarters. Revenue rose 3 percent to $831.8 million. The company’s broadcast group, which includes nine network affiliates, reported a 2 percent increase in revenue driven largely by the addition last year of Oklahoma City UPN affiliate KAUT-TV. Excluding that station, the broadcast group would have recorded a 2 percent decline in revenue, as declines in automotive advertising and network compensation more than offset higher revenue tied to the Winter Olympics in February.

Media General’s 26-station broadcasting division reported a 4 percent increase in revenue to $73.5 million, while operating profit advanced 4 percent to $11.8 million, driven by growth in local and national advertising. The company said political advertising revenue was $250,000, which it called “minimal” but meeting expectations for the first quarter. Those results offset weakness at the publishing division and helped the company swing to a first-quarter profit of $6.7 million, versus a year-earlier loss of $316.2 million, which included an accounting-related charge for valuing intangible assets other than good will.