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Yellow Media Ltd, survived a debt restructuring last year that all but wiped out shareholders; now CEO Marc Tellier, who doubled down on print directories as online substitution cut into the century old business, has announced he's leaving. An ominous sign for the company's future? Not necessarily. A close look at the company's numbers suggests that, if current trends hold, the worst is likely over. That doesn't mean investors should touch the stock yet – there's more bleeding to come.
Revenues from print directories continue to drop faster than they are being replaced by revenues from online offerings, including its heavily visited Canada411.ca and RedFlagDeals.com websites. Print revenues dropped by almost $400-million from 2010 to 2012, while online ncreased by $100-million.
And print revenues have further to fall: they were $740.5-million in 2012, accounting for two-thirds of the company's total. As print revenues have declined , so too have overall operating earnings, from $757-million in 2010 to $571-million last year.
Online revenues increases won't make up for print any time soon. But let's dial up some assumptions and see what the future may hold. In the first case, let's assume that print revenues fall by 25 per cent per year while online revenues grow by 15 per cent – in line with what happened in 2012. Then let's take a more dire case: print deteriorates by 30 per cent while online only grows by 10 per cent. In both cases, assume an operating profit of 51.5 per cent of revenues, the level of the past two years.
In the relatively more optimistic scenario, online becomes the bigger revenue generator by 2015, the year that both revenues and operating profits bottom out (at $937-million and $483-million, respectively), before rising again the following year. In the –30/+10 scenario, the bottom comes one year later, with a revenue base of $715-million and operating earnings of $368-million.
In either case, revenues and profits are well down , but even in the more severe scenario , Yellow's net debt (assuming it stays the same) to operating earnings only rises from 1.4 to 2.1 at the trough – higher, to be sure, but not life-threatening.
These are merely back-of-the-envelope predictions, and the reality could be more challenging. While the company insists operating margins for its newer online products are as high as print, those margins could suffer given the more competitive environment online. But they do show that the day isn't far off when the firm's future hinges more on how its online business fares rather than how it survives the decline of its traditional business. If, however, Yellow Media can't maintain some digital revenue growth momentum for at least the next four years, the company's trademark fingers could indeed walk – off a cliff.
Sean Silcoff is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Sean on Twitter at @seansilcoff.
Sean Silcoff