Veronis Suhler Stevenson Issues Annual Communications Industry Report, Complete Financial Analysis of Publicly Reporting Media/Information Companies Industry¹s Five-Year Growth Rate of Publicly Reporting Companies Beats GDP Radio and Broadcast TV Saw Ad Spending Pick Up in First Half of 2002 Dot-Com Bubble Burst Notwithstanding, Consumer Internet Posted Highest Five-Year Growth Rate Among All Segments Number of Publicly Reporting Media Companies Dropped 37% to 353 since 1999
NEW YORK (October 24, 2002) When compared to the overall economy and to other industries, publicly reporting communications companies held their ground in 2001, amid a weak overall economy. Adjusted total revenues for publicly reporting communications companies inched up 2.5 percent to $261.7 billion in 2001, according to the 2002 edition of Veronis Suhler Stevenson Communications Industry Report (CIR). In addition, adjusted total operating cash flow edged up 1.7 percent to $54.8 billion in 2001. Operating cash flow return on assets dropped to 7.6 percent, a decline of 5.6 percentage points since 1998, mainly as a result of write downs at companies with Internet-related assets.
Revenue growth still outperformed overall communications industry spending, which fell 0.3 percent in 2001, even while experiencing the slowest growth in a decade. In addition, when compared against Nominal GDP growth of 3.4 percent, the publicly reporting universe of communications companies held its own. Operating cash flow margins, even in this difficult environment, was a great 20.9 percent.
Furthermore, the industry reported a five-year CAGR of 10.4 percent for revenue from 1997-2001 ‹ almost four percentage points higher than overall GDP growth of 6.5 percent. Factor in the operating cash flow margin of 20.9 percent in a difficult economic environment, and what emerges is an industry that has survived the recession, a little battered, but among the stronger economic sectors of the economy due to its wide variety of revenue-generating sources.
³The communications industry was hardly immune from the economic downturn, but when compared to the economy as a whole and to other industries, it didn¹t do badly,² said James Rutherfurd, executive vice president and head of investment banking at Veronis Suhler Stevenson. ³Furthermore, once you consider the five year results, you would note that the publicly reporting communications companies did significantly better than the overall economy and outperformed most other industries as well.²
³We believe some signs are now pointing toward a stabilized recovery of the industry,² Mr. Rutherfurd added. ³What the CIR shows is the background to today¹s environment: A technology meltdown and an economic recession that worsened following the September 11 terrorist attacks caused the first communications spending decline in decades. This combination of negative trends took a massive toll on the advertising industry, which trickled down into just about every communications sector. However, in the first half of 2002 we have seen some signs of a turnaround.²
A recovery that was beginning to take shape in August 2001, but was blunted by the events of September 11, has begun to re-emerge in 2002. Veronis Suhler Stevenson reports that radio became the first advertising-based medium to post an upswing in spending the first quarter of 2002, which was followed by broadcast television in the second quarter. In fact, consumer-oriented media grew at an accelerated pace in 2001, bucking the downward trend. Consumers, longing for an escape from economic and social concerns, sought comfort in movies, video rentals and video games.
A Contracting Industry
The CIR notes in 2001 there were 353 publicly reporting companies, down from 440 in 2000 and 560 in 1999, a 37% shrinkage over the two year period. Mergers, bankruptcies and companies unable to float IPOs were the primary factors contributing to the contraction, 50 percent of which were Internet-related and did not exist prior to 1999. Indeed, the industry retrenchment is most prevalent in the consumer Internet sector. In an arena that boasted 112 companies in 1999, the segment¹s collapse left just 36 publicly reporting companies in 2001. It should be noted that the majority of the companies that were in the 1999 edition CIR were still very much alive in 2001.
This heavy consolidation came close to tripling asset value over a four year period. However, the adjusted value of the assets increased only 0.5 percent to $723.5 billion in 2001, with a compound annual growth rate of 26.8 percent from 1997-2001. Furthermore, operating income on returns on assets contracted for the fourth consecutive year, to 2.2 percent in 2002, as large media companies are still burdened to create profits from their myriad acquisitions of the late 1990s. In addition, the number of communications companies with at least $1 billion in revenue fell for the second consecutive year to 64, from 68 in 2000 and 70 in 1999.
³The sheer number of companies tracked has contracted markedly, reflecting the high rate of casualties from companies created during the Internet boom and their subsequent demise after the bust,² Mr. Rutherfurd said.
The 10 largest publicly reporting companies in 2001 based on North American communications revenue included many that grew via large acquisitions in the late 1990s. Topping the list was AOL Time Warner with $40.3 billion in revenue. That was followed distantly by Viacom, with $18.8 billion, which rose to the number two spot from number three. Swapping places with Viacom is Walt Disney Co. with $15.7 billion, taking the number three spot in 2001. Fourth and fifth place were Sony, posting $9.3 billion in revenue, and Bertelsmann AG, with $7.8 billion, both staying put from 2000. Rounding out the top 10 were Thomson, with $7.0 billion in revenue; Omnicom Group with $6.9 billion; Interpublic Group of Companies with $6.7 billion; Reed Elsevier with $6.6 billion; and Gannett with $6.3 billion.
The CIR ranks the Top 50 companies based on North American revenues according to multiple criteria: revenue, five-year revenue growth, operating cash flow margins, change in operating cash flow margins 1997 vs. 2001, operating cash flow return on assets (ROA) and change in operating cash flow ROA 1998 vs. 2001.
The Veronis Suhler Stevenson CIR is the most comprehensive annual survey of financial data for the communications industry, tracking 353 publicly reporting companies in 12 industry segments from consumer print and broadcast media to specialized business information, professional and educational media, and the Internet. Each segment¹s analysis includes five years of North American company data on total revenue and its growth, operating income and cash-flow trends such as margins and returns on assets, growth of asset size, and depreciation and amortization.
Traditional vs. New Media
Despite the Internet meltdown, for publicly reporting consumer Internet companies, 2001 was a mixed year. On the one hand, Internet service providers shot to Number 2 in 2001 in operating cash flow margin among all communications subsegments (29) from Number 28 in 2000. Internet service providers posted operating cash flow margins of 39.0 percent in 2001, a remarkable turnaround from a 71.4 percent cash flow margin in 2000. On the other hand, the industry¹s problems were most pronounced among Internet content providers, which posted a 151.9 percent operating cash flow margin in 2001, the lowest among all communications industry subsegment rankings in that category.
The top spot in the cash flow margin category was held by a traditional media standard. Cable & satellite networks took over as the top industry subsegment in 2001, posting 44.9% percent operating cash flow margins. Traditional media segments had a heavy presence in the top of the cash flow margin rankings in 2001, as radio broadcasting, television station broadcasters and out-of-home media rounded out the Top 5. At the bottom of the list along with Internet content providers were new media segments, such as e-marketers and search engines/portals.
Despite the burst of the Internet bubble almost three years ago, the segment has actually performed quite well. Over a five year period (1997-2001), the Internet segment has posted the highest compound annual growth rate (CAGR) of any segment tracked by the CIR. The category as a whole posted a 32.3 percent CAGR. Broken down into subsegments, Internet content providers posted a 69.9 percent CAGR, search engines saw a 73.3 percent CAGR and Internet service providers posted a 28.5 percent CAGR. Five years ago, the Internet was still a developing medium. Having an extremely low starting point, the growth in the sector was able to be explosive, posting strong numbers early on in the time frame and is now settling down as a more mature media segment.
Segment-by-segment highlights include:
Advertising, Marketing Services and Specialty Media: A total of 59 companies combined saw a 3.6 percent gain in revenue in 2001 to $38.1 billion with a five year CAGR of 13.7%. The segment also posted a 15.1 percent advance in operating cash flow, and a 13.4 percent CAGR from 1997-2001. The operating cash flow margin was 16.2 percent, consistent with three of the four previous years and operating cash flow return on assets was 10.3 percent, a slight decline of 3.4 percentage points since 1998. A 10.7 percent increase in adjusted operating income was mainly contributed by growth among marketing services holding companies. The top three companies, according to revenues, were Omnicom Group, Interpublic Group of Companies and WPP Group.
Broadcast Television: Adjusted total revenues for the 44 publicly reporting companies declined 2.0 percent in 2001, to $29.8 billion, with operating cash flow dropping 15.3% to $8.1 billion and adjusted total operating income plunging 19.7 percent to $5.1 billion. Five-year CAGR grew 8.1 percent for revenue and 7.2 percent for operating cash flow. The operating cash flow margin was 27.2 percent, in the range of the four previous years and operating cash flow return on assets was 10.3 percent, a slight decline of 2.6 percentage points since 1998. Value of assets declined 3.5 percent to $77.43 billion. Loss of ad revenue resulting from the recession and September 11, coupled with declining ratings and increasing programming costs contributed to the losses. The top three companies, based on revenues, were Walt Disney Co., which owns ABC, Viacom, which owns UPN and CBS, and General Electric, which owns NBC.
Cable & Satellite Television: Consolidation and acquisitions helped the 32 publicly reporting companies in this sector post huge gains in 2001. Adjusted total revenues jumped 16.6 percent to $52.0 billion in 2001 and cash flow increased 23.1 percent to $17.1 billion. Over a five-year period, the industry held up very well, posting a CAGR of 20.6 percent in revenues and 26.5 percent CAGR growth in operating cash flow. The operating cash flow margin was 32.9 percent, up 1.7 percentage points from 2000 and operating cash flow return on assets was 5.7 percent, a decline of 4.1 percentage points since 1998. However, the segment experienced an operating loss of $1.1 billion and after years of double digit growth in value of assets, 2001 only saw that value increase 4.5% to $307.3 billion. The top three companies in the segment were AOL Time Warner, Hughes Electronics (DirecTV) and Comcast.
Radio Broadcasting: A slew of acquisitions and consolidation in the sector produced a mixed report for the 25 publicly reporting radio station networks and station broadcasters. Adjusted total revenues declined 1.6 percent to $6.8 billion, with 21.7 percent CAGR growth. Total operating income plummeted 30.1 percent to $698.8 million, but over the past five years, operating cash flow margins increased at a compound annual rate of 24.0 percent. Consolidation in the segment helped the value of assets, which increased 10.9% to $50.8 billion, while total operating cash flow increased 18.3 percent to $2.5 billion. The operating cash flow margin was 36.6 percent, higher than 2000 levels and slightly off 1999. Operating cash flow return on assets was 5.1 percent, a slight decline of 3.8 percentage points since 1998. The top three companies in the segment were Viacom, Clear Channel Communications and Westwood One.
Entertainment: Digital music piracy woes in the music industry was felt over the entire entertainment sector, as the 39 publicly reporting companies saw an overall decline in revenues, income and cash flow in 2001. Total revenues fell 6.9 percent to $44.1 billion, and operating income declined 11.6 percent to $1.5 billion. Operating cash flow slipped 0.9 percent to $4.2 billion, while the value of assets in the sector declined 3.2 percent to $84.7 billion. Five year CAGR for revenue was 2.5 percent, while operating cash flow receded at a compound annual rate of 2.9 percent from 1997-2001. The sector had operating cash flow margins of 9.5 percent, up from 8.9 percent in 2000 and operating cash flow return on assets was 4.8 percent, a decline of 4.9 percentage points since 1998. AOL Time Warner, Sony and Vivendi Universal rounded out the top three companies, based on revenues, in the sector.
Consumer Internet: As stated earlier, 2001 was a mixed year. Following a massive market contraction, the 36 publicly reporting companies, down from 112 in 1999 and 63 in 2000, combined to have the slowest growth year on record, and experienced declines across many categories. Revenues grew 9.1 percent to $12.3 billion, with an 11.2 percent decline in operating cash flow to $2.3 billion. Revenue grew at a compound annual rate of 32.3 percent from 1997 to 2001, while operating cash flow CAGR was 99.6 percent. Operating losses totaled $37.6 million in 2001, while value of assets declined 22.5 percent to $14.2 billion. The operating cash flow margin was 18.5 percent, down slightly from 2000, but still significantly higher than from 1997-1999. Operating cash flow return on assets was 14.0 percent, an increase of 12.8 percentage points since 1998. The top three companies in the sector were AOL Time Warner, EarthLink Network and Yahoo!.
Newspaper Publishing: Beaten by a dismal advertising market, total revenues for the 20 publicly reporting companies in the sector declined 4.7 percent to $23.7 billion but five year CAGR was 3.0 percent. Those lower revenues in 2001 contributed to an operating cash flow decline of 17.6 percent to $5.6 billion in 2001, while operating cash flow margins over a five-year period edged up just 0.6 percent. The operating cash flow margin was 23.6 percent, down 4 percentage points from 2000 and operating cash flow return on assets was 14.7 percent, a decline of 10.2 percentage points since 1998. Operating income also fell, plunging 25.8 percent to $3.9 billion while the value of assets slipped a modest 2.8 percent to $37.7 billion. Gannett, Tribune Co. and Knight Ridder were the top three companies in the sector, based on revenues.
Consumer Book Publishing: Despite a decline in spending across the sector, the consumer book industry had a positive year. However, due to publishing houses being owned by foreign entities, data inconsistencies leaves the analysis incomplete. Adjusted total revenues among the 16 publicly reporting companies rose 8.5 percent to $4.6 billion, and operating cash flow increased 17.3 percent to $815.3 million. Operating income for the sector rose 2.6 percent to $483.2 million in 2001 and the adjusted value of assets rose 2.1 percent to $3.7 billion. Consumer books posted an operating cash flow margin of 17.9 percent, up slightly from 2000 and operating cash flow return on assets was 22.1 percent, an increase of 8.9 percentage points since 1998. CAGR for the segment was 10.1 percent for revenues and 11.0 percent for operating cash flow. The three largest companies, based on revenues were Reader¹s Digest Association, Bertelsmann AG and Scholastic.
Consumer Magazine Publishing: The soft economy and the advertising slump dealt a setback to the magazine industry. The 16 publicly reporting companies, while posting adjusted revenue gains of 3.0 percent to $7.5 billion in 2001, operating cash flow declined 10.9 percent to $927.4 million and companies reported an operating loss of $204.9 million. Revenue growth grew at a compound annual rate of 1.8 percent from 1997-2001, while cash flow receded at an annual rate of 2.6 percent over the same period. Operating cash flow margin was 12.4 percent, down 2.4 percentage points over the four previous years and operating cash flow return on assets was 3.2 percent, a sharp decline of 20.9 percentage points since 1998. Adjusted total assets increased 14.4 percent to $31.4 billion. AOL Time Warner was the largest company in the sector, based on revenues, followed by Bertelsmann AG and Gemstar TV Guide.
Business-to-Business Media: B-to-B media was the hardest hit of all communications sectors in 2001, with both the economic and advertising recessions and the terrorist attacks contributing to the massive decline. Revenues declined 10.5 percent to $2.2 billion in 2001 for the 12 publicly reporting companies, but the CAGR over a five year period was a bright spot, up 9.6 percent. Operating cash flow sank 35.9 percent to $376.6 million and posted a negative CAGR of 2.5 percent. The operating cash flow margin was 17.2 percent, down from the segment¹s four-year average and operating cash flow return on assets was 10.9 percent, a decline of 6.7 percentage points since 1998. Operating income collapsed 58.0 percent to $172.0 million. Adjusted value of assets slipped 1.8 percent to $3.4 billion. The three largest companies in the sector were Reed Elsevier, United Business Media and McGraw-Hill.
Professional, Educational and Training Media: The 51 publicly reporting companies in this sector suffered from corporate cutbacks in 2001 and spending grew at its slowest rate in more than 10 years. Adjusted total revenues declined 3.9 percent to $12.3 billion in 2001, with adjusted total operating cash flow decreasing 19.6 percent to $2.0 billion. Operating cash flow margins for the sector was 16.2 percent and operating cash flow return on assets was 11.6 percent, a slight decline of 3.9 percentage points over the past five years. Five year compound annual growth for the segment was 9.6 percent for revenues and 8.2 percent for operating cash flow. Adjusted operating income fell 16.5 percent to $991.5 million, with value of assets remaining essentially flat. Pearson, Thomson and McGraw-Hill were the three largest companies, based on revenues.
Business Information Services: Corporate cutbacks overwhelmed this sector as well, as the segment posted its first downturn in years. Adjusted revenues for the 71 publicly reporting companies increased 7.5 percent to $28.3 billion in 2001, with operating cash flow increasing 4.0 percent to $4.8 billion, driven by sales of online subscription products. The segment posted a 11.3 percent CAGR in revenues from 1997-2001, but posted a slight decline in growth of 0.8 percent in operating cash flow. The operating cash flow margin was 16.8 percent, continuing a slow descent that began in 1997, and operating cash flow return on assets was 11.8 percent, a decline of 10.8 percentage points since 1998. However, operating income declined 22.8 percent to $305.6 million, largely based on massive losses posted by WebMD, and adjusted value of assets dropped 16.2 percent to $36.7 billion. Reuters was the largest company in the segment, based on revenues, with Thomson and Reed Elsevier following.
The CIR has been produced annually since 1984 by New York-based Veronis Suhler Stevenson. For the first time this year, the CIR industry segment summaries are included in the recently published Communications Industry Forecast, and is also available as a stand-alone CD-ROM which features user friendly Excel charts for $499.00. For more information on the Veronis Suhler Stevenson CIR, visit www.vss.com. The 2002 Communications Industry Forecast sells for $1,995. To order, call , ext. 8556.
Veronis Suhler Stevenson, a leading independent merchant bank dedicated to the media, communications, and information industries, was founded in 1980. Since its formation, the firm has acted as a financial advisor across the full spectrum of media-industry segments including Broadcast and Cable Television; Newspaper Publishing; Consumer Magazines; Business-Information Services; Consumer, Professional and Educational Books; Business-to-Business Media; Specialty Media & Marketing Services; Entertainment; and the Internet.
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