Hearst reports record profits, cites its efforts to build great companies in the business data and software sector

Hearst reports record profits, cites its efforts to build great companies in the business data and software sector

Omnichanel Story, Courtesy: Hearst Corporation

Hearst President & CEO Steven R. Swartz Letter to Employees on Hearst’s 2017 Performance

Dear Colleagues:

Hearst achieved record profits for the seventh straight year, as our efforts to build and acquire great companies in the business data and software sector helped overcome a tough year for many of our consumer media franchises.

Our biggest majority-owned business, Fitch Group, led the way with an outstanding performance across the world, particularly in its core bond ratings business.

Strong profit growth was also achieved by CAMP, the aviation safety company we acquired in late 2016, as well as Hearst Health, our portfolio of six essential healthcare businesses, and Hearst Transportation, our auto sector group. All of these businesses, which we collectively call Business Media, sell data and software that customers use in their daily activities, a powerful proposition in the increasingly cluttered information landscape. In 2017 these businesses accounted for 28 percent of our total profit, a number that has more than tripled over the past decade, and one that will continue to grow over time. Our only regret is that we failed to make another big acquisition in this sector in 2017. We can only say it wasn’t for lack of trying.

Total Hearst profit was also helped by gains on the sale of investments. Revenue was flat at $10.8 billion, although this included an expected big drop at our Hearst Television group coming off the record highs of 2016 powered by gains from the presidential election and the Olympics. With elections and Olympics back on the agenda, Hearst Television will have a strong year in 2018, and we expect the company’s revenue to grow along with it.

2017 was another great year to be a consumer of media products but less so to be a provider of that content. While platform companies like Google, Facebook, Amazon and Netflix thrived through their dominance of advertising and ecommerce channels, many individual media brands struggled to get their share of the advertising pie and consumers bought fewer television bundles or magazine subscriptions.

We are fortunate to be in a host of different media sectors in all different stages of taking on disruptive forces, and those that have been in the battle the longest offer constructive and quite optimistic lessons for those businesses that are newer to the fight. Our television group, now 30 stations strong under President Jordan Wertlieb, went through an early form of disruption from cable television, but fought back thanks to tenacious programming and sales efforts in our local markets, winning significant gains in fees from distributors, and strong political advertising gains due in part to our best-in-class political journalism. If it weren’t for the terrible hurricane that struck our Houston and Beaumont markets, Hearst Newspapers, under President Mark Aldam, would have recorded its sixth straight year of profit gains in 2017 after previous years of struggle when the internet took away much of its classified advertising business. The keys to the turnaround were unique local editorial products, a huge ground game of local sales professionals, such digital innovations as starting local digital ad agencies in each of our major markets, and getting our readers to pay us a fair price for the products we deliver to their door and their mobile devices each day. (A special salute is in order for our San Francisco Chronicleteam of Publisher Jeff Johnson and Editor Audrey Cooper and the Houston Chronicleteam of Publisher John McKeon, Editor Nancy Barnes and Managing Editor Vernon Loeb. Their leadership at our largest newspapers at a time of great challenge for the industry has been exemplary.)

Now our magazine and cable television groups are in the crosshairs of disruption. In magazines, led by President David Carey and Publishing Director Michael Clinton, our world class digital operation made significant gains in 2017, and some of the newer magazines we have launched over the past 10 years, namely Food Network Magazine and HGTV Magazine, are among our best editorial products and most profitable titles. (Special thanks to Food Network’s Editor-in-Chief Maile Carpenter and Publisher Vicki Wellington, as well as HGTV Editor-in-Chief Sara Peterson and Publisher Dan Fuchs). In 2017 we tested another new magazine, this time with Food Network star Ree Drummond, called The Pioneer Woman Magazine, and it looks like we and our great partner Scripps Networks have another winner on our hands. (Scripps, led by Ken Lowe, has agreed to be acquired by Discovery, so we look forward to welcoming our new partner, under CEO David Zaslav, in 2018.)

Still, the magazine business needs more change. With respect to many of our titles, we need the readers to pay more for the product. And we need to find a way to make digital subscription products work for magazines in the way that they are starting to work for newspapers. Near the end of 2017 we agreed to acquire Rodale’s magazine business, with such well-established titles as Men’s Health, Women’s Health and Prevention. The addition of these titles will give our magazine business a shot in the arm and some new talent to help in our efforts to keep innovating and experimenting as we reset the business model for the future.

Cable television networks have been by far the best traditional media business of the past 30 years. Great channels, offering highly targeted programming to viewers and advertisers and essentially getting paid by almost every household in America every month made for a superior business model, and it is still a darn good one. But the competition for viewers and ad dollars has intensified. For our extraordinary cable network assets, A+E Networks and ESPN, the lessons from our past battles with disruption will surely apply here: remake the cost base, make the core product as good as it possibly can be, and develop new revenue streams to replace dollars lost. No one in cable is doing that as aggressively as ESPN, under our majority partner The Walt Disney Company, led by Bob Iger. 2017 was a very tough year for ESPN in many respects but with Disney’s majority acquisition of Major League Baseball’s BAMTech streaming digital platform and sports-game steaming service, ESPN will in 2018 launch a major effort to market additional sports games and content of all stripes to the super fan, directly to their home. We can’t wait for ESPN Plus and for the numerous innovations our ESPN and A+E managements will bring to their core and digital offerings in 2018.

2017 brought a wave of consolidation to the media industry, led by Disney’s announced acquisition of 21st Century Fox. We’re convinced this transaction will prove a win for both parties, and the sports, entertainment and distribution assets that Disney will be getting will benefit our jointly held assets, ESPN and A+E, as well as our 14 ABC-affiliated television stations. In addition to our Magazine group’s planned acquisition of the Rodale magazine assets, our Newspaper group acquired newspapers in and around New Haven, Connecticut and Alton, Illinois, and we certainly expect to acquire more newspapers over time, largely where geographic synergies and/or regional market opportunities are possible. As for consolidation generally, we are happy with the assets we own, but we are open to acquisitions or combinations that will strengthen our existing businesses.

We continue to find exciting pockets of growth within the media landscape, and we made two quite promising investments on this front in 2017 under Entertainment & Syndication President Neeraj Khemlani. The music industry has gotten back to growth after well more than a decade of disruption-fueled revenue declines, and we were excited to invest in Kobalt, a music publisher and artist representative with a particular technological advantage. Founder Willard Ahdritz has built a highly sophisticated digital platform to track streams and downloads across the world on all major platforms, from Spotify to Apple, and calculate in real time what artists and songwriters are owed, boosting the accuracy and timeliness of collections. Kobalt is now the fifth largest music publisher in the world, and we expect more impressive growth in 2018.

iflix is a platform for streaming premium video to mobile devices, with a specific focus on emerging market countries. Based in Malaysia and founded by entrepreneurs Patrick Grove and Mark Britt, iflix partners with telecommunications companies in the more than 20 emerging market countries where it operates, thereby lowering customer acquisition costs and allowing for an affordable and popular service. Having grown rapidly throughout Asia and parts of the Middle East, iflix opened for business in several African nations in late 2017.

Each year we make numerous investments through our capital process and through our various venture capital activities. Hearst spent more than $200 million in capital investments in 2017 to strengthen our existing businesses with new software, new equipment and new office space. The biggest such effort in 2017 was an ambitious project to install a new Oracle cloud-based financial system across the company, in effect changing our flight systems while still flying the plane. This is a tremendous amount of work and we can’t thank enough our financial and technology colleagues who have labored tirelessly to push this project forward. We also invested more than $30 million in various venture capital projects in core media and technology, finance and healthcare. Our various venture operations now have offices in New York, San Francisco, Tel Aviv, London and Beijing, and one of our investments, television technology platform Roku, went public in late 2017 and got a very strong reception from the market. HearstLab, our incubator for women-led technology startups, now has eight companies in it that we’ve invested in and that work out of our offices. Another five companies have already graduated from the Lab and moved on to bigger quarters, reflecting their strong growth.

Fortunately for us enough of our investments pay off in handsome realized gains to make all these efforts worthwhile, and this was the case again in 2017. Among our profitable transactions were the sale of unneeded television spectrum in the FCC’s spectrum auction, and a gain on the sale of our investment in FIMALAC, the holding company of our partner in Fitch, Marc Ladreit de Lacharrière, who took his company private in 2017.

Job one in our investment plan is to make a big acquisition in our Business Media operations each year, and while that didn’t happen in 2017, Business Media President Rich Malloch and our team looked at scores of companies and met some very impressive entrepreneurs. Some of these founders brought their businesses to us, thinking we’d be a good permanent home for their company as opposed to the repeated reselling that happens in the private equity industry. We enjoyed those meetings and regret that we couldn’t get a deal across the finish line last year, but we encourage more of these encounters, and we’re very hopeful of success in 2018. Rich and Hearst Health President Dr. Greg Dorn did make a smaller investment that we are very excited about, taking a significant minority stake in healthcare data and software company M2Gen. A venture started by the Moffitt Cancer Center in Tampa, Florida, M2Gen unites 17 teaching hospitals and their doctors and patients who choose to participate in a unique data sharing arrangement that seeks to combine cancer patients’ clinical and genetic data to arm drug and biotech companies with rich data sets and clinical trial participants in the fight to develop highly specified treatments for different cancers. We welcome M2Gen CEO Tim Wright, Executive Chairman Bill Dalton and their colleagues and our equity partners at Moffitt and The Ohio State University to the Hearst family.

As with M2Gen, being in good businesses that also do good is a hallmark of our company, and in 2017, the positive impact many of our businesses make on society was on full display. Hurricanes hitting our newspaper and television markets in Texas and Florida and terrible fires in California reminded readers and viewers of the essential role our journalists play in their communities. Our television group also conducted a year-long effort in their communities to battle the opioid crisis plaguing so many families across the country.

In a year that was so tumultuous politically and culturally, we are thankful for our culture, developed by those who came before us, most notably by my longtime predecessor Frank Bennack, and nurtured and monitored by our Board of Directors, under Chairman Will Hearst. We approach our work each day with the overriding principal of respect for our colleagues, our readers and viewers, and our partners.

All of our operating groups recorded various milestones and made exciting new hires and promotions in 2017. Here are some of the highlights:

Fitch, led so well by CEO Paul Taylor, recorded record revenue and profit and grew market share in its core ratings business thanks to continued investment in strengthening its outstanding fundamental credit research and analysis. The global bond market was incredibly healthy in 2017. Investors’ strong desire for fixed income assets helped keep interest yields low, making it very attractive for companies around the world to issue more debt and more of that debt than ever carried a paid Fitch rating. At our Fitch Ratings unit, we named longtime executives Ian Linnell president, Karen Skinner chief operating officer and Brett Hemsley chief analytical officer.

Many of our Business Media companies also had record results including CAMP, under CEO Ken Gray and President Vibby Gottemukkala, Hearst Health businesses’ First Databank, under President Charles Tuchinda, MD, MCG Health, under President Jon Shreve, Homecare Homebase, under CEO April Anthony and MedHOK, under CEO Anil Kottoor. MedHOK named Gary Stuart president and Homecare Homebase named Scott Decker president in late 2017. Hearst Transportation also had record results under group leader Tom Cross.

At Hearst Television, we won our ninth straight Walter Cronkite Award for outstanding political journalism. We named longtime Hearst TV colleagues Frank Biancuzzo and Mike Hayes executive vice presidents and Barb Maushard, Eric Meyrowitz and Emerson Coleman senior VPs of news, sales and programming, respectively. Steve Hobbs and Nick Radziul did a superb job negotiating our carriage agreements with distributors, and CFO John Drain successfully navigated us through the spectrum auction. Saturday morning educational TV specialists Litton Entertainment, acquired in 2016, had record results under CEO and Founder Dave Morgan.

Hearst Newspapers hit a milestone where across the group revenue from subscriptions, both print and digital, and from digital advertising were together 57 percent of total revenue, a key measure in our effort to lessen our dependence on print advertising revenue. While our focus is increasingly on selling subscriptions to our premium news products, traffic to our free to the consumer breaking news websites surged in 2017 to 7 billion page views and 42 million unique users, increases of 12 percent and 60 percent respectively.

At Hearst Magazines group, our KUBRA digital payments and services business had record results under CEO Rick Watkin, and iCrossing, our digital advertising agency had strong profit growth under President Mike Parker. Magazines digital, under President Troy Young, reached 81 million unique visitors on Snapchat’s Discover platform alone. Harper’s BAZAAR celebrated its 150th birthday and Nina Garcia was named editor-in-chief of ELLE.

A+E, under CEO Nancy Dubuc, had a stronger ratings year at the A&E channel led by hit show LivePD, and HISTORY was a top ten channel for the ninth straight year. Rob Sharenow, who led the turnaround at A&E, was named head of programming for the group.

Led by CEO Rich Antoniello, our Complex digital content joint-venture with Verizon produced three streaming shows that each recorded more than 2 million weekly views: Everyday Struggle, Hot Ones and Sneaker Shopping. Jordan Levin became CEO of AwesomenessTV, our digital content venture with NBCUniversal and Verizon.

Rocky Shepard stepped down after 18 years running King Features, succeeded by C.J. Kettler. We are grateful for Rocky’s many years of service there and at Hearst Magazines.

Two of our groups saw longtime chief financial officers announce their retirement in 2017, Jack Condon at Newspapers and Bob Wilbanks at Business Media. Congratulations to Barnabas Kui and Denielle deWynter, who moved up into those roles, respectively.

Finally, on our Corporate team, CFO Mitch Scherzer, CTO Phil Wiser, General Counsel Eve Burton and project leader Debra Robinson formed a fabulous team working diligently to begin installing our new finance, HR and payroll systems. Our never-ending effort to find and close acquisitions was boosted by Chief Legal and Development Officer Jim Asher, Finance VP Mark Smadbeck, Deputy General Counsel Mark Redman and team, and Finance VPs Gabby Munoz, Barin Rovzar and R.J. Lehman. Thanks also to SVP Lincoln Millstein, Ventures co-heads Scott English and Ken Bronfin, Chief Investment Officer Roger Paschke, Deputy General Counsel Jon Donnellan and his litigation team, Treasurer Carlton Charles, Controller Steve DeLorenzo, tax chief David Kors and benefits head Arleane Soto, our Communications team of Deb Shriver, Alex Carlin, Paul Luthringer and Judith Bookbinder, and the technology group’s Chief Information Officer, Joe Leggio, who joined us in 2017.

The media landscape is not promising to get any easier in 2018, but I can’t imagine a company with a stronger team, a stronger and more diversified collection of businesses, and stronger balance sheet ready to meet these challenges. On behalf of Chairman Will Hearst and Executive Vice Chairman Frank Bennack, thank you all for what you do for Hearst, for our customers, our partners and our communities every day, and all the best for a successful 2018.


Steven R. Swartz
President & Chief Executive Officer

January 2, 2018

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