Earnings Rise at Random House Despite Sales Slip

Bertelsmann's Random House subsidiary had worldwide revenue of just under 2 billion euros ($2.11 billion) in 2002, a slight decline from the prior year, when revenue was just over the 2-billion euro level. EBITA (earnings before interest, taxes and amortization) was 168 million euros ($178 million) last year, up from 33 million euros in 2001. (Because Bertelsmann shifted its fiscal year in 2002 from one that ended on June 30 to one ending December 31, 2001, results are on a pro forma basis.)

The jump in earnings despite no sales growth was attributed to a significant reduction in corporate overhead made throughout Random, particularly in Germany, where book sales were the weakest. Revenue in Random's English-speaking divisions was up, with the best performance last year coming in the U.K., Australasia, South Africa group, which posted a 12% EBITA margin. Random House North America was close behind with an 11% margin resulting from a modest sales gain and cost reductions. But the North American market was by far Random's largest, with sales of 1.37 billion euros ($1.45 billion), an 11% increase over the fiscal year ended June 30, 2001, the last time Bertelsmann reported actual full year results. Random U.S. published more than 3,500 new titles in 2002, including more than 100 new authors.

Random House chairman Peter Olson said the publishing company "had a solid year in a challenging environment." Olson said he was particularly pleased that Random's worldwide EBITA margin of 8.4% in the year was closing in on Bertelsmann's target of a 10% margin. Olson was confident that Random's North American group will have another solid year in 2003 and could have a "very solid" year if the economy improves. He noted that although Random's publishing program has produced more than 50 bestsellers in the first quarter, sales have been sluggish because of the weak retail environment. He said sales of bestsellers continue not to meet the same level as a year ago, something he attributed in part to the public's distraction caused by the Iraqi war. Olson said Random's financial performance would depend on how fast consumer confidence returns once events in the world begin to settle down.

In other book-related subsidiaries, Bertelsmann reported that revenue in the DirectGroup fell to 2.71 billion euros from 3.09 billion euros and that the operating loss increased to 150 million euros from a loss of 61 million euros in 2001. The deeper loss was due to the company's decision to exit various Internet businesses and to restructuring in its music clubs. Book clubs account for 75% of the DirectGroup's total revenue, with music clubs contributing 19% and e-commerce 6%. The North American market generated 1 billion euros in club business last year.

Bertelsmann said that the best results were turned in by the clubs in France and Spain, while Bookspan and the U.S. music club "returned to profitability" in 2002. The clubs in Germany and Great Britain had "considerable" revenue declines in 2002 and "high losses."

Revenue at BertelsmannSpringer, the professional publishing division that is up for sale, fell 2.3% to 731 million euros, although EBITA rose 20%, to 71 million euros. The drop in revenue was attributed to a decline in business-to-business advertising sales. Bertelsmann expects to sell Springer before the end of the first half of 2003.

Bertelsmann's worldwide sales fell 3.5% in the year, to 18.3 billion euros, although EBITA rose 63%, to 936 million euros. Net income fell to 928 million euros from 1.23 billion euros, as results in both years had a number of extraordinary items.

Random House Sales by Geographic Segment
($ in millions)