Mixed Messages From Margins

Margins remained solid in 2013 for the six large trade houses from which operating data is available, though at three of the six, margins fell compared to 2012. Although the companies that had the biggest gains in earnings—and thus margins—last year cited higher e-book sales as a factor, it seems clear that publishers can’t rely on rising e-book sales to protect their margins forever. That was made particularly clear at Harlequin, where operating earnings fell 28.9% on a 6.7% drop in revenue. In its report, Harlequin’s Canada-based parent company Torstar cited “relatively flat” e-book sales in North America and declining print sales as the reasons behind the drop in performance. In its overseas markets, the decline in print sales was not offset by gains in e-books. Total e-book sales rose by about 12% at Harlequin in 2013 and accounted for 24.1% of overall sales, compared to 20.7% in 2012.

Profits also fell at Penguin Random House last year, although direct comparisons to 2012 are impossible, since the merger between Penguin and Random House occurred on July 1, 2013, and combined sales for the two companies are only available for the second half of the year. Some of the decline in operating EBIT was due to one-time charges associated with the merger. Much lower sales last year of the highly profitable Fifty Shades trilogy, which helped lead standalone Random House to record profitability in 2012, was another factor in the earnings decline.

Houghton Mifflin Harcourt’s trade publishing group posted higher sales in 2013 than in 2012, but EBITDA fell 15.3%. HMH attributed the decline, in part, to higher selling and administrative costs, as well as a change in the sales mix. In 2012, HMH posted big gains for a number of backlist titles, including several by J.R.R. Tolkien, due to the release of a film adaptation of The Hobbit. E-book sales accounted for 13.2% of revenue at the company last year.

Simon & Schuster had the biggest gain in profits last year among the companies that reported data for 2013, helped in part by the absence of charges associated with the e-book price-fixing litigation that depressed earnings at some other major houses in 2012 as well. In addition, S&S said increased e-book sales led to a decline in production and distribution costs, and helped improve the bottom line. Digital sales rose 22% in 2013 and accounted for 27% of all revenue. Lower restructuring charges also gave a boost to earnings. S&S parent company CBS said in its annual report that restructuring charges for the publisher in 2013 were $1 million, primarily reflecting severance costs, while restructuring charges in 2012 were $3 million, due mainly to costs associated with combining several imprints.

HarperCollins had a strong EBITDA showing, despite a decline in revenue for the last six months of 2013, compared to the final half of 2012. In its quarterly filing, HC parent company News Corp said that the revenue decline was due to the sale of its Women of Faith events program and soft Christian book sales, primarily in the July-through-September period, offsetting gains in general book sales led by the Divergent series. Improved margins were due in part to “operational efficiencies and lower manufacturing costs, reflecting the continued shift to e-book sales,” News Corp noted. E-book sales rose 35% in the six-month period that ended Dec. 31, 2013, compared to the last half of 2012, and represented 19% of worldwide HC sales.

Revenue dipped and recurring EBIT was flat at Lagardere Publishing in 2013, leading to a small improvement in margins compared to the prior year. The French-based company said EBIT improved “significantly” at its U.S. subsidiary, Hachette Book Group. The unit’s overall sales were up 6%, driven by a 33% increase in digital sales, which accounted for 30% of total HBG revenue last year. E-books accounted for 10.4% of revenue for all of Lagardere Publishing in 2013, up from 7.8% in 2012.

Publisher Operating Results, 2012–2013

(in millions)

*Results for 2012 and the first six months of 2013 are solely random house; the final six months of 2013 include random house and penguin.

Source: Publishers Weekly