While the headline EBITDA result of $146 million may seem positive, all other metrics suggest a “steeper than expected” softening of key metrics. I will take some direct quotations from their MD&A:
The decrease [in revenues] for the three-month period ended March 31, 2012 is due to lower print revenues, especially in urban markets where revenues declined at a much higher rate than rural markets. We have identified new trends, which indicate that the print decline will be more rapid and enduring than previously anticipated.
I like the statement “we have identified new trends” since it implies that management did some deep research to discover this when it seems pretty obvious the company had to identify this by experiencing it directly.
Online advertisers, who in the past, purchased our legacy online products, are not migrating to our new products as quickly as we had anticipated. This now suggests that the online revenue growth will be slower than we had projected […] Online revenue growth is not expected to compensate for the declining revenue in our traditional print offerings in the near future.
Uh-oh! Could it be the case that the online advertising market is a hell of a lot more competitive?
In terms of the numbers themselves, the focus should be on the balance sheet: The company on March 31 had $310 million in cash, and on May 7 had $292 million in cash. When you account for the fact the company made a $25 million payment on their non-revolving credit facility, it actually implies they generated $8 million during those 5 weeks. I wouldn’t extrapolate this for the whole year!
The “adjusted earnings”, which is roughly a modified free cash flow calculation, was $67.3 million, down from $133.6 million from the quarter in the previous year. While the company is still generating a good deal of cash, the amount is declining at an alarming rate.
I ignore the $3 billion write-down of goodwill – for the uninitiated, they will now see the $785 million stockholders’ deficiency when normally they are accustomed to seeing it called stockholders’ equity. Any analyst worth his/her salt would have made that mental adjustment from day one, and this will hopefully silence the lunatics citing Yellow Media as a good value because of its exceedingly good price to book ratio.
In the raw calculus, the company has $292 million in cash, and they have to pay back $394 million by February, 2013, another $130 million by July 2013, and $125 million by December 2013. If you take the optimistic approach and assuming their decay in cash generation will flatten, they can barely pay off the maturities to the end of 2013, but who in their right mind would believe that things have flattened out?
The company is most likely going to go into some form of restructuring that will address its debt issues. This is likely to be very punitive toward equity holders and also the subordinated debenture holders. They will probably be given a few scrap bones to expedite the process.
Medium term notes are at around 67 cents for the near maturity, and about 60 cents for further maturities on the ask. Debentures are at 17 cents, and perpetual preferred shares (TSX: YLO.PR.C / YLO.PR.D) received a speculative spike over the past few days from 3 cents of par to 4. Suffice to say, the dividends on those preferred shares aren’t coming back anytime soon.
Thankfully, no positions in YLO – I’ve already taken my lumps previously and am just watching how this very unusual financial train wreck unfolds.