Magazines as moneymakers; they may not score well compared to the superstars in today's communication industry, but ��

Magazines as moneymakers An investor or entrepreneur wanting to participate in the profitable, fast growing communications industry, where revenues advanced twice as fast as the Gross National Product's growth of 7.4 percent in the period 1982-86, could do handsomely by putting his money in newspapers or cable TV. The profitability of these segments of the communications industry is outstanding, with pretax income equal to around 18 percent of revenues. A person could also own a magazine and still find it more profitable than most other industries.

Nevertheless, according to the New York communications investment banking firm, Veronis Suhler & Associates (VS&A), consumer magazines ranked last in pretax operating margin among 10 segments of the communications industry in 1986, the most recent year for which data are available.

Publicly owned business magazine publishers did better--12.8 percent pretax income (as a percentage of revenues) versus 8.7 percent for consumer magazines. Still, the profitability of business magazine publishing suffered a sharp decline between 1984 and 1986, as reported in VS&A's recently published (December 1987) annual Communications Industry Report.

Given these results, why are magazines targeted as desirable takeovers by many communications companies? Why do they attract leveraged buy outs? What encourages investors to continue to put money into magazine start-ups?

"Consumer magazines don't rank high in profitability within the communications industry," says J. Michael Hadley, a senior vice president of Veronis Suhler, who specializes in magazines and advertising. "That's because they're being measured against profit superstars. But compared to manufacturing or transportation, for example, communications is a high performance industry--and magazines, in reality, are doing well."

To underline Hadley's point, Business Week's Top 1,000 Companies had a composite margin (profits as a percentage of sales) of 4.7 percent in 1986, compared with 14.6 percent for the 267 publicly owned communications companies tracked by Veronis Suhler & Associates.

Meanwhile, General Electric Co., one of the country's best managed corporations, earns a pretax profit of 7 percent to 8 percent. That contrasts with 11 percent for all magazines, publicly and privately owned, as measured by Magazine Publishers of America.

A lure to investors

But it's cashflow that makes magazines particularly attractive to investors, according to James E. Boddorf, Veronis Suhler & Associates executive vice president for business magazine publishing and business information services. Boddorf notes that business magazines generate a 16 percent (of revenues) cashflow margin, which is better, for example, than book publishing, recorded music and entertainment.

Cashflow margin is not one of your everyday operating words in magazine publishing, but Boddorf calls it "the mother's milk of the business." Says Boddorf, "It's what enables owners to reinvest in growth activities, borrow funds and pay dividends. It's the single most important thing investors look at when acquiring magazines."

Pretax operating income, the most widely used measure of magazine publishing profitability, is what's left from revenues after you've paid all operating costs, met selling and general administrative expenses, and accounted for depreciation and amortization. The latter two, however, are not cash expenses. They are calculated as a percent of physical plant and other assets of the publishing business; when they are brought into play, they have the effect of reducing the amount of the company's income that is subject to tax.

Operating cashflow, on the other hand, excludes depreciation and amortization because they are not part of the out-of-pocket expense of operating the business, but are merely bookkeeping entries reflecting the treatment of previously acquired assets.

Another attractive factor

Moreover, the Communication Industry Report's measure of cashflow does not include another important aspect of consumer magazine operation: deferred subscription income. This is the cash that readers advance to the publisher for their subscriptions. Before the publisher has the expense of printing and delivering magazines to the readers, he has the use of their cash. When you add that factor to cashflow, it becomes easier to understand why magazines are attractive properties.

"All in all, cashflow is a better and truer reading of the magazine business," says Boddorf.

Cashflow also figures strategically in takeovers. When an acquirer takes over a magazine, the purchase price becomes the new asset base. This new larger number generates higher depreciation and amortization charges. As a result, net income may drop. But cashflow is unaffected and may even be higher.

"Higher amortization reduces reported earnings," notes Boddorf, "but cashflow is unaffected. And if the takeover produces operating efficiencies, cashflow may improve."

According to the report, magazine publishing enjoys better cashflow as a percent of employed assets (around 23 percent in 1986) than do radio and television broadcasting, book publishing and cable television.

Reasons to invest

Meanwhile, cashflow isn't the only reason magazines continue as an attractive business to be in, despite pretax and after-tax income margins that aren't as high as they are in other segments of the communications industry.

"Magazines are extremely attractive to invest in," says Hadley, "for a variety of reasons. For one thing, magazines aren't as vulnerable to technical change and to competition in the United States from foreign imports such as steel or electronic products, for example,"

If language and culture erect powerful barriers against foreign competition and imitators, Hadley also stresses that magazines are a transitory and a talent business.

"With magazines, it doesn't take a lot of capital to go after a bright new idea," he says, noting that the magazines generate revenues relative to their asset base that are unequaled in the communications industry. In the years 1982 to 1986, for example, the VS&A segment of publicly owned consumer magazines generated between two and four dollars for every dollar of gross assets employed. Contrast that with the next best performer, radio and television broadcasting, where it took one dollar of assets in 1986 to generate just 68 cents of revenue.

"You don't need to own a printing press to published a magazine," says Boddorf. "Equally well known is that a magazine's principal assets often go down in the elevator every night."

Because magazine publishing is not a capital-intensive business, but one where unique concepts are important, the rewards can be bountiful when a magazine is sold . . . often at a high multiple of the investment originally needed to start it.

A very dynamic business

"It's a very dynamic business," notes Hadley, who is the former president of Times Mirror Magazines, Inc. "As changes occur in our society, they create publishing opportunities for magazines.

"Consumer magazines reflect what people are doing at any given time. Standard Rate & Data, for instance, listed 50 percent more consumer magazines in 1986 than there were in 1977," says Hadley. "There were 18 categories in SRDS that did not exist 10 years earlier, including computers and fitness," he adds.

Boddorf, a former executive vice president of the McGraw-Hill Publications Company, echoes Hadley. "New business magazines constantly are coming into being to reflect changes in the economy and the creation of new technologies and industries," Baddorf points out. "It's a very dynamic environment."

Both VS&A executives agree that magazine ownership can position a company to enter new fields. Subscribers can be persuaded to buy other products. "Readers Digest, for example, used their lists to get into [condensed] books," notes Hadley. "Books led them into travel and home improvement. Now Reader's Digest has completed the loop by buying Travel Holiday and Family Handyman magazines."

Business magazines, on the other hand, have the opportunity to use the special knowledge of their fields to become information providers. Certainly the profits are attractive.

In Veronis Suhler's Communications Industry Report, Business Information Services rank second only to newspaper publishing as the most profitable segment of the communications business. Thiry-one publicly owned companies creating and selling business information, including giant McGraw-Hill, enjoyed a 19.1 percent pretax operating incom margin in 1986, far better than magazines.

"One of the attractions of the business information services segment," says Boddorf, "is that while the ways to succes are less well known, when you do find them, competitors don't immediately come in, as they do in magazine publishing.

Although business magazines have been suffering a downturn in profits (pretax income of this VS&A segment fell 4.6 percent in 1986), Boddorf believes a turnaround is inevitable. But he says that many business magazines could be doing better if they had developed ancillary activities such as seminars, conferences, books, newsletters and computer databases to offset advertising's cyclical downturns.

"Too many publishers are focused totally on their magazines, only attempting to maintain or increase their share of linage, cutting ad rates if necessary. It has eroded profits.

"Publishers shouldn't be just magazine lovers," concludes Boddorf, "they should be information lovers, with the magazine serving as the core of the information services they offer.

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