Meredith Stumbles With Time Inc. Purchase, and Now Lawyers Are Circling

At least five law firms have announced actual or potential class-action lawsuits against Meredith Corporation following the company’s disappointing earnings report and forecast last week.

A lawsuit filed in a federal court on Friday, Wirthwein v. Meredith Corporation, charges that Meredith and two of its executives had previously failed to tell investors that “the Time, Inc. acquisition was not as profitable as the Company had claimed” and that Meredith “would incur additional costs for strategic investments to improve the Time business.”

The lawsuit notes that Meredith’s lowered earnings forecast falls far short of a goal the company reaffirmed in August 2018: “generating $1 billion of adjusted EBITDA in fiscal 2020.”

Another law firm that is investigating Meredith for alleged “stock fraud” quoted an analyst’s statement that Meredith “didn’t know what they were buying with Time Inc.”

“The patient [Time Inc.] was a little sicker than we expected when we acquired it,” Tom Harty, Meredith CEO, stated the previous day during a conference call with investment analysts, in discussing the deal that made Meredith the country’s largest magazine publisher. “The advertising piece of it was a lot worse than we expected” when the $1.8 billion deal was consummated Jan. 31, 2018. “We had two years before we acquired it with their mismanagement. The business was down 25% year over year in print advertising.”

Such deterioration in Time’s print-advertising, digital-advertising, and magazine-subscription operations have subsequently sapped about $350 million from Meredith’s earnings, Joe Ceryanec, the company’s chief financial officer, told the analysts.

Meredith announced Thursday that its expected Fiscal Year 2020 EBITDA (earnings) will be $640 million to $675 million, which one law firm charged was “well below analysts’ expectations of $793 million” – as well as being lower than FY2019’s $706 million EBITDA.

Meredith executives’ statements last week included a mixed bag of bad surprises and favorable developments that both provide some interesting insights on the magazine-media business as a whole.

Circulation Surprise

“The number of low-margin magazine subscriptions we encountered inside the legacy Time Inc. brands were more than anticipated,” Harty said. “They had significantly pulled back on their investment in what we would call direct-to-publisher subscriptions. … When they were in a cash crunch, they went to what I would say less profitable longer-term subs and pulled back on that investment in the range of about $20 million a couple of years ago.”

Explanation:

In the long run, subscriptions that a publisher sells itself tend to be more profitable than those sold by subscription agents. But it may take years for the upfront investment in printing and postage to pay off. In its final months (or years), Time Inc.’s subscription strategy shifted from long-term investment to short-term cash flow. Meredith got stuck with a lot of low-profit subscriptions that are harder to renew than direct-to-publisher deals.

What the lawyers may end up arguing about is whether Meredith should have recognized what Time was doing, included safeguards to prevent it, and not waited so long to reveal the problem.

Meredith is projecting a decrease in consumer revenues during 2020 because as “low-margin magazine subscriptions inside the legacy Time Inc. brands” come up for renewal, the company is investing in shifting them “to more profitable sources.”

Advertising Outlook

Print advertising sales at the legacy Time titles are back on track, rising by a “low single-digit” percentage in the most recent quarter. The company is expecting “mid-single digit declines” in ad revenue across all its print titles in 2020 (which would be a better trend than the recent trajectory for most large-circulation U.S. magazines). Sales at People, Meredith’s most valuable title, were up last quarter and are on track to be positive again in this quarter and the next.

Digital advertising was flat in calendar year 2018, lagging expectations, but Harty said “we’re seeing double digit growth today.”

Meredith is bullish on Apple News+, a new multi-publisher platform for digital magazines, including 30 Meredith titles. When it comes to working with publishers, Apple has a checkered history. But Harty noted that Apple News+ provides royalties “based on the time consumers spend with our brands on the platform,” lower subscriber-acquisition costs, lower production and postage costs as digital subscriptions take the place of print subscriptions, and “innovative advertising opportunities.”

E-commerce and digital video are experiencing high growth.

One thing you can say for Meredith: It’s not cutting corners to prop up its short-term earnings at the expense of longer-term growth. It’s spending about $30 million to create a single content-management system and to enhance its video-production and data-management capabilities. Another $20 million will be spent to boost direct-to-publisher subscriptions and to improve its Apple News+ capabilities.

Such prosaic investments are unlikely to win friends on Wall Street in the short term, but publishing people will recognize them as signs that Meredith is managing for growth rather than hunkering down.