Yellow Media Inc. reported a loss, slashed its dividend by 75 per cent and suffered a credit-rating downgrade to junk status, showing the company faces mounting challenges as it transitions from print directories to online marketing.
Shares of the company went into freefall, plunging 43 per cent Thursday to close at $1.10 and extending a dramatic decline this year. The shares have plummeted from more than $6 at the start of the year amid growing worries about future earnings power and a heavy debt load.
Yellow Media is in the midst of a crucial transition as it moves away from a declining business selling ads in the print directories it publishes to an online and mobile marketing firm that competes with global digital heavyweights such as Google Inc.
But the company’s current results have rattled investors. Yellow Media reported a loss from continuing operations of $20.7-million, or five cents a share, in the second quarter, compared with a net profit of $53-million, or nine cents, in the same period last year. The company cited a loss of $50.5-million from its investment in Ziplocal, a local search company acquired last year as part of its purchase of directory rival Canpages.
In an attempt to assuage concerns about its $2.4-billion debt load, the Montreal-based company announced a 75-per-cent cut in its dividend to common shareholders on Thursday, from 65 cents to 15 cents a year. A large cut was widely expected, and will save the company about $260-million per year, chief executive officer Marc Tellier estimated.
The announcement was followed by a decision by Standard & Poor’s to downgrade the company’s corporate rating to speculative or junk status – to double-B-plus from triple-B-minus.
“The key driver [of the decision]is the business profile of the company itself … this is not an investment grade business profile,” S&P credit analyst Madhav Hari said. “Structurally, there’s going to be a lot more margin pressure at this company, plus they’re going to be making investments they have to do to transition to an online competitor.”
While ratings agency DBRS maintained Yellow Media within investment status, it also downgraded the company’s debt to “adequate credit quality,” with negative trends.
“We looked long and hard at the business risk of the digital business, and felt that it wasn’t the same that the legacy print business has enjoyed for a number of years,” DBRS analyst Chris Diceman said. “While the business risk profile is different and it may cause some pressure on revenues and EBITDA in the near term, it’s really critical for the survival of the company to invest in that digital transition.”
From Mr. Tellier’s perspective, however, Yellow Media’s only failure has been an inability to communicate how well the transition to a digital competitor is going. Digital revenues were up in the second quarter, to $85.9 million, representing one-quarter of the company’s total revenues. The company predicted that online revenues would account for half of its total revenues by the end of 2014.
“Clearly this is a journey. We’re still in the early days … but so far we’re encouraged,” Mr. Tellier said in an interview. “Our hope is, once the dust settles here, we will be in a position where the dialogue around Yellow Media will be fundamentally grounded on our business transformation, and not some of these ancillary debates around level of indebtedness, et cetera. … And I’m not saying the level of indebtedness wasn’t a legitimate worry, but clearly we’ve very decisively [taken action on]that today,” with the dividend cut.
The ratings downgrades mean it will now be more expensive for the company to borrow money.
“We’re going to be reducing our debt position so much that our interest expense is going to drop … a lot more than the [increased]cost of financing,” Mr. Tellier said.
Debt was also a motivator earlier this year for Yellow Media to sell its Trader Corp. unit. The $708-million deal closed last month, and the company said it will use those proceeds to cut debt and reinvest in its core business.
Yellow Media’s revenue for the three months ended June 30 was down 4.8 per cent to $342.7-million, due to declining revenues from the company’s traditional print business.
Whether the growth in the digital business will compensate for losses on the print side continues to be a concern for Yellow Media.
This uncertainty led the company to withdraw its financial guidance for this year, and also to announce it would no longer give guidance on annual revenues and earnings, a move that RBC analyst Drew McReynolds called “worrisome” in a note on Thursday.
Yellow Media’s strength to power the transition to digital lays in its sales force, Mr. Tellier argued. The company has an entrenched base of customers with the legacy product. For small and medium-sized businesses, choosing how to advertise online can be daunting, and its sales people can help demystify that process.
“Big picture, we still believe that is a competitive strength. Google and others are not doing that. They’re trying to reach into the local space from 50,000 feet away,” DBRS’s Mr. Diceman said.