Penguin, S&S Take Different Paths

Although the Penguin Group and Simon & Schuster reported similar revenue gains in 2006, the two giant publishers achieved the increases in different ways. S&S's gains were led by strong sales of adult frontlist titles—You: On a Diet, Lisey's Story, State of Denial and Paula Deen Celebrates—while Penguin benefited from robust backlist sales and solid gains in the mass market and trade paperback formats. Penguin's sales outside the U.S. were particularly strong, most notably in India and the U.K., while S&S's domestic operations gained, augmented by the recovery last year from a horrible 2005 in the U.K.

There were some similarities in their growth patterns. Both Penguin USA and S&S reported that growth in spoken-word audio was led by digital downloads; S&S noted that digital downloads now account for 10% of audio revenues, while Penguin said that download sales rose 50% last year. Sales of premium editions helped to drive sales in the mass market paperback format at both companies, with Penguin CEO David Shanks especially pleased with results last year. Penguin will publish 21 premium mass market paperbacks in 2007 and S&S will publish 24.

The increase in backlist sales helped push operating income up by 10% at Penguin. "We knew if we were to improve margins, backlist sales had to improve," Shanks said. The improvement in margins at Penguin was curtailed by the writeoff of a few million dollars related to the AMS bankruptcy, while S&S took a larger writedown in the year to reflect the bankruptcy. Neither Shanks nor S&S CEO Jack Romanos believe the collapse of AMS will have a negative impact on sales in 2007. Romanos observed that the "good news" coming out of the bankruptcy was that other companies have developed the expertise to supply books to the warehouse clubs, AMS's biggest customers. Shanks noted that AMS had developed a very efficient software program that allowed it to resupply the chains, and he hoped that whoever acquires AMS takes the software, too.

Romanos was confident that S&S will beat 2006 results in 2007. The publisher is off to a strong start, led by several titles that were selling well late in 2006, as well as the surprise blockbuster The Secret. Other titles S&S expects to do well this year include Jodi Picoult's Nineteen Minutes; Where Have All the Leaders Gone? by Lee Iacocca; and Joel Osteen's Become a Better You. S&S also received an endorsement from parent company CBS—CEO Les Moonves told analysts that he expected S&S to be part of CBS "for a long time to come."

Shanks wouldn't comment directly on prospects for 2007, but said the entire Penguin Group will keep working to improve the bottom line to reach a 10% operating margin by 2008. He expects a strong contribution from frontlist sales in 2007, driven by such titles as Alan Greenspan's The Age of Turbulence; A Thousand Splendid Suns by Khaled Hosseini; and The Assault on Reason by Al Gore.

2006 Results
($ in millions)