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On May 10th, Time reported 1Q17 adjusted net loss of $18 million, or -$0.18/share, compared to a net loss of $11 million, or -$0.11/share a year ago. This was below consensus estimates for a loss of -$0.15/share. Time shares fell 14% on the day. The full release can be viewed here.
Revenues of $636 million were 8% lower than a year ago and below consensus estimates for $642 million in revenues. While Viant’s acquired revenues added about 2 percentage points of revenue growth, the strong dollar removed about 2 percentage points of growth. Operating income before depreciation and amortization (OIBDA, another name for Ebitda) of $23 million was 47% below the year-ago result. The OIBDA margin was 3.6% compared to 6.2% a year ago.
The shares fell sharply for several reasons:
- Dividend cut prompted aggressive selling by a large, yield-oriented constituency. The 1.2% yield removes an attractive feature for investors as well as a brake on ill-fated acquisitions by the management team. However, repaying debt with the incremental $60 million of cash flow does help reduce the company’s financial risk.
- Operating results were very weak. The company said that talks relating to the company’s possible sale disrupted marketing and sales activity in the quarter. Fair enough, especially in a media company, but Time’s revenue problems seemed to accelerate in the quarter.
- Management won’t provide annual revenue guidance, quarterly pacings guidance or long-term targets for its strategic plan. Without these, investors will have little way of measuring whether the company is meeting its targets or evaluating whether management’s plan is worth more than the likely $20+ deal value that was turned down. This change increases uncertainty which lowers the company’s value. Legendary investor Leon Cooperman whose firm Omega Advisors owns about 3.9% of Time, spoke aggressively on the conference call about the lack of disclosure or strategic benchmarks.
- Activist Jana Partners sold their entire position, adding to the selling pressure. This sale was disclosed in regulatory filings on May 15th. While disappointed with Jana’s exit, we think the company’s low share price and strong cash flow make it an attractive target for activists in addition to current holder Leon Cooperman.
We view other changes as positive:
- Former CEO Joe Ripp is leaving as chairman. As the unsuccessful former CEO, his continued involvement was counterproductive in our view. Howard Stringer will also be leaving the board. Stringer will be replaced by incoming new director Dan Rosensweig, currently Chairman and CEO of digital media company Chegg.
- Management is becoming more aggressive with its cost-cutting efforts, indicating a potential for as much as $100 million in potential cuts, about 25% of their annual OIBDA run-rate.
With all the changes to the dividend, strategy (cancelling of sale), guidance, board and the new tenure of Rich Battista as CEO, investors are throwing in the towel. The shares are essentially at the same price as our initial recommendation. Time’s outlook is more uncertain now, but clear positives remain:
- Management is under tremendous pressure from Omega and possibly other shareholders to produce value, particularly following the strong likelihood that the company could have been sold for upwards of $20-25/share.
- The new CEO and new management have the opportunity to make more aggressive changes to the company (with previously mentioned pressure noted). The company re-iterated their $400 million OIBDA guidance for 2017.
We continue to like Time’s prospects as its new CEO looks capable of executing their turnaround strategy and boosting the company’s earnings power. We also wouldn’t dismiss the possibility that investors force the company to reconsider a sale if the financial results don’t meaningfully improve over the next 6-12 months. We continue to rate TIME shares a BUY up to 21.