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The McClatchy Company (NYSE:MNI)

Q2 2014 Earnings Conference Call

July 24, 2014, 12:00 PM ET

Executives

Ryan Kimball - Assistant Treasurer and Director, Investor Relations

Patrick Talamantes - President and Chief Executive Officer

Robert Weil - Vice President, Operations

Mark Zieman - Vice President, Operations

Elaine Lintecum - Vice President, Finance and Chief Financial Officer

Analysts

Avi Steiner - JPMorgan

Michael Kupinski - Noble Financial

Bradley Tesoriero - CRT Capital

Michael Kass - Blue Mountain Capital

Craig Huber - Huber Research Partners

Phillip Pennell - Mariner Investment Group

Operator

Good afternoon. My name is Courteney, and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter 2014 earnings conference call. (Operator Instructions) Ryan Kimball, you may begin your conference.

Ryan Kimball

Thank you, Courteney, and thank you all for joining us today for our second quarter 2014 earnings call. I am Ryan Kimball, Assistant Treasurer and Director of Investor Relations, and I'll be available to answer any follow-up questions you may have, after our call this morning. My phone number is 916-321-1849 and you can also find my contact information on our website.

This call is being webcast at mcclatchy.com and will be archived for future reference. Our earnings release was issued this morning before the market open, and I hope you've had a chance to review it.

Joining me today is Pat Talamantes, our President and CEO; our Vice Presidents of Operations, Bob Weil and Mark Zieman; and our Vice President and CFO, Elaine Lintecum.

This conference call will contain forward-looking statements that are subject to risks and uncertainties that are described in our SEC filings. Actual results may differ materially from those described during the call. Also, non-GAAP amounts discussed this morning are reconciled to the most directly comparable GAAP measures in schedules posted on our website.

Now, I'd like to turn the call over to Pat Talamantes.

Patrick Talamantes

Thanks, Ryan. Thank you all for joining the conference call today for a review of our second quarter results. It's a busy quarter for McClatchy. Before I review our operating performance, I'd like to discuss some important events that occurred during the quarter.

On April 1, we received a pre-tax cash distribution totaling $147 million or $91 million after-tax, from Classified Ventures related to their sale of Apartments.com. Shortly thereafter, we exited our partnership in McClatchy-Tribune Information Services or MCT, while remaining both a continuing contributor and a user of the valuable information provided by MCT to our newspapers. Then later in the quarter, on May 5, we completed the sale of Anchorage Daily News for $34 million or $25 million after-tax.

The additional liquidity provided by these transactions boosted in already healthy cash balance up to $265.3 million as of the end of the second quarter. We now have even greater flexibility to strategically reduce debt and to focus more resources on accelerating our digital transformation.

You can see our ongoing digital transformation in a number of ways. I'll go through those in detail in a moment, but it is evidenced by strong growth in our digital-only revenues and continuing increases in our digital audience, powered by growth in mobile. We expect to make further progress on these and other fronts, as we continue to invest revenue generating initiatives and enterprise-wide operating systems.

Let's start by reviewing second quarter revenue performance. In the second quarter, total revenues finished down 3.2% compared to the second quarter of 2013. Our audience revenues were impacted by a slowdown in print advertising in May and June that offset the Easter-related pickup in retail advertising in April. We also faced a very difficult comparison in national advertising, which was up 9.1% in the 2013 quarter as well as loss of revenues from Apartments.com.

For the quarter, total advertising revenues were down 7.0% and were down 6.6% in the quarter, excluding the revenues from the Apartments.com. And while our print advertising trends were challenging, we grew total digital advertising, which was driven by 10% growth in digital-only ad revenues.

Excluding in revenues in 2013 from Apartments.com, digital-only ad revenues looked even better, up 14.0% in the quarter. And for the quarter, total digital-only related revenues, including both advertising and audience revenues, finished up 13.8%, excluding the impact of Apartments.com.

Within categories, total retail advertising finished down 8.4% in the quarter, the same as Q1 of 2014. As we noted, the sluggishness in the retail space impacted our print retail results, the digital retail ads were up 7.8% in the quarter and digital-only was up an impressive 22.8% compared to the same quarter last year. We again had encouraging results from our impressLOCAL program, which was launched company-wide over the course of 2013, and we saw continued solid growth in other banner revenues.

Moving to national advertising. We saw a decline of 19.4% in the second quarter of 2014, a worsening trend brought about by a top 9.1% comp to last year. The softest sectors this quarter were telecom and banking. Revenue volatility is enorm in the national category, but it is one of our smaller revenue sources accounting for only about 7% of our total ad revenues. Unfortunately, we have easier comp now in national for the next four quarters.

Classified advertising finished down 6.7% in Q2 of 2014 and was down 5%, excluding the impact of Apartments.com. During the quarter digital-only classified advertising revenues were up 8.9% to prior year, and were up 17.0%, excluding Apartments.com.

The automotive category performed well again this quarter with total auto advertising finishing down 2% compared to down 4.8% in Q2 of last year. Growth of 10.4% in total digital auto ad revenues and 17% growth in digital-only revenues were behind this result.

Total real estate ad revenues were down 9.6% compared to the same quarter last year, but excluding Apartments.com related revenues from the 2013 quarter, they were up 1.5%. Total digital real estate revenues were down 18.7% in the quarter, but again after Apartments finished, up 13.9%. While still challenging, the employment category did improve relative to the first quarter, as we saw a sold improvement in our Southeast and Texas region.

Direct marketing revenues finished the quarter at 3.8% compared to the same quarter last year, as our Sunday Select product continues to do quite well. Direct marketing and total digital advertising revenues contributed 43% of our total advertising revenues on a combined basis in the second quarter.

Now, let's switch gears and talk about our audience. As we've said, we measure our audience as the combined and duplicated audience of our digital products and our newspapers, and our strategy is to extend our total reach in our markets, regardless of the platform.

For the quarter, audience revenues were up 5.0% compared to the same quarter last year. Audience revenues were down 3.1% after excluding an increase of $7 million of revenues related to the transition to fee-for-service circulation delivery contract at certain newspapers during the quarter.

We are focused on growing audience revenues over time and as such we continue to work on expanding our audience, especially our digital audience. For the quarter, monthly unique visitors were up 7.7% compared to the same quarter last year, despite the lowering of our limit for free page views for desktop readers down to seven news stories from 15 stories in 2013.

Mobile users represented a significant 43.8% of our total monthly unique visitors during the quarter. We've also been busy improving the design and navigation of our mobile and desktop browser sites and native mobile applications. June was a busy month in this endeavourer.

First, we moved mobile app development in-house and relaunched our iOS and Android phone and tablet app. Moving app development in-house gives us greater design flexibility and allows us to respond to changes in consumer and advertise or market conditions more quickly.

Also The Kansas City Star working with McClatchy Interactive launched a new and improved responsive-designed mobile and desktop browser site, designed with the needs of mobile consumers and advertisers in line. We expect McClatchy papers will be rolling out responsive-designed website by the end of 2015 and hopefully for most or sooner.

Jumping back to financial results for the quarter. Income from equity investments declined $4.6 million in the second quarter, due to lower income from certain internet investments and lower results from our newsprint mill partnerships.

Classified Ventures' results included legal, accounting and other Apartments.com transaction-related costs in 2014, and also included Apartments.com results in the second quarter of 2013, with obviously no results in the second quarter of 2014. These items masked the continued growth in Cars.com results in the second quarter of this year.

Let's move now to expenses. Operating cash expenses, excluding severance and certain other charges, increased 1% in the quarter compared to the second quarter of 2013. While expenses were up, it is important to note that they included the increase of $7 million related to that fee-for-service circulation transition, I mentioned a moment ago. We've been offsetting increase in audience revenue, so there is no impact on our operating cash flow.

When these audience expenses are excluded, operating cash expenses were actually down $4.6 million in the quarter or 2.0% compared to the 2013 quarter. Cash expenses this quarter also included $3.6 million in investments related to new revenue initiatives in digital infrastructure such as enterprise-wide operating systems.

Drilling down a bit, compensation expense, excluding severance, decreased 2.6% in the quarter and we also saw a 3.3% decline in total newsprint and supplements expense. Newsprint by itself was down 11.4% with that decline being partially offset by a 16.2% increase in supplements expense, which includes outsourced printing cost.

The primary driver behind that increase was outsourcing the printing of our Fort Worth newspaper to The Dallas Morning News, beginning in March of this year. Our other cash expenses, before the circulation cost change, were down 0.8%.

We have also made notable progress in strengthening our capital structure and improving our liquidity situation. As I mention at the beginning of the call, our cash position at the end of the quarter was $265.3 million. Obviously, the cash distribution from Classified Ventures and the proceeds from the sale of Anchorage Daily News were significant transactions that helped our cash position.

At the end of the first quarter, total debt was $1.556 billion and our leverage ratio at the end of the first quarter on a net debt basis, which is debt net of cash on hand, was 3x cash flow. Bank-defined EBITDA in the quarter includes the $147 million distribution from Classified Ventures related to the sale of Apartments.com.

As we look to the rest of the year, it's difficult to make predictions without retail advertising, particularly in print. We remain focused on providing advertising solutions, using all of the print, digital and direct marketing products, we have at our disposal. For the remainder of 2014, we expect double-digit growth in digital-only ad revenues, low-single digit growth in direct marketing and improving trends in audience revenues in last half of the year.

We remain vigilant in controlling expenses and expect operating cost on a comparable basis to be down in the low-single digits in 2014 compared to 2013, even as we invest in technology platforms and new products.

And with that, I'd like to thank you for your time this morning. And we'll be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Avi Steiner with JPMorgan.

Avi Steiner - JPMorgan

I want to start on the balance sheet, if I can. First, and if you said this, I apologize, but does the cash balance reflect the pre-tax amount from Apartments.com or is taxes on that already been paid?

Patrick Talamantes

The $265 million is before the tax payments related to Anchorage and Apartments.com. That would be $65 million that we'll owe during the third quarter. And so net of those tax payments on those transactions will be at $200 million.

Avi Steiner - JPMorgan

And then, could you refresh us on the size of RP basket?

Patrick Talamantes

Elaine, you want to go through that?

Elaine Lintecum

Sure. Absolutely I do. The RP basket at the end of the quarter is about $596 million.

Avi Steiner - JPMorgan

So moving on, your cash balance obviously elevated even on an x tax basis, yet you still haven't repurchased debt. And I am just curious, is it a timing issue, is it a negotiation issue, which you may not want to talk about. Are there other options you're looking at, would you consider sending cash to shareholder, et cetera?

Elaine Lintecum

Of course, we've mentioned that that we've got $65 million of taxes due in the quarter, and then we'll have a fairly large interest payment to make also in the fourth quarter. We do have $29 million of our 2014 bonds that are maturing in November and that will also kind of come out of that cash balance.

But you're right, our current liquidity situation is certainly a high-quality problem, and we're gratified in the confidence of the company that's reflected I think in our bond prices. The good news is that we have a long run, as you know, between now and 2022. So our current bond maturity schedule allows us a lot of flexibility, as we continue to kind of pursue our strategic plans and as we continue to transition our business to a more digital business.

So kind of we'll wait and watch and look at that. And certainly, when we think about returns to shareholders, liquidity plays a role there as well. But we also have to think about our need to reduce debt, to invest in digital assets to further our transformation, and to grow our digital revenues and the overall financial health of the business.

So the truth is that we look at all of these alternative uses for cash. Paying down debt, returning money to shareholders, what we need to do at our digital transformation, and we discuss all of those with our Board of Directors as well.

So we'll continue to watch the debt markets, look at our operations, give considerations, all of these things. And we'll be patient, even if it means holding cash for some period of time and we'll purchase debt, when it makes economic and strategic sense for us and use cash in other ways, when it makes sense for us. So I know that wasn't a completely satisfying answer, but it's the right answer.

Patrick Talamantes

And it's the truth, so here we go.

Avi Steiner - JPMorgan

Turning to some line items on the income statement. On the circ or I guess audience line now negative 3% x those adjustments, does this reflect kind of the end of the benefits to Plus Program, decline in print subs, can you talk about both? Can you tell us where I think you -- excuse me, you stew, disclosed subs, and I didn't see that this time at least on that new program?

Patrick Talamantes

So, Avi, I think there is a combination of things going on here. One, you're right. We're rolling off comparisons on the Plus Program, in the prior years that had an impact. Of course, volumes had an impact as well, that's something that we're dealing with also.

I think as we look forward to the rest of the year, the reason why we gave the guidance of improving audience trends over the balance of the year, which simply is because virtually all of our papers are looking at both their single copy pricing and looking at strategic opportunities on home delivery, to see where some price increases might make sense. And have put some of those in place, but it won't be realized until we get into the second half of the year, because it does take a while for some of the pricing to work through the system. So we do feel good about the trends improving over the course of the balance of the year.

On the digital-only subscriptions, I continue to think that that's really a function of our paywall thresholds. Currently, as I mentioned that the desktop threshold is at 7%; the mobile thresholds are much higher, because of the propensity for people to swipe through stories and that sort of thing.

So there is a lot more usage some times per visit than on the desktop sites. So we scale that accordingly. But as we work through the paywall threshold model, I think we will see increases in digital-only subscriptions. We just haven't really seen them yet, but that number has been relatively static in the last few months, and we'll just continue to work with that.

Elaine Lintecum

Paywall digital subscriptions are still around the $65,000 range with about roughly $35,000 I think as a result of Plus Program continuing push at digital-only.

Avi Steiner - JPMorgan

Looking back to this quarter, were there any transaction-related cost and expenses that maybe weren't excluded? And then, looking forward on the cost guidance was there X investments and fee for service adjustments or anything like that?

Patrick Talamantes

So let me make sure I've got. Your last question, Avi, was whether our guidance was -- I'm sorry can you repeat the question?

Avi Steiner - JPMorgan

All right, I get it. I'll break it up into two questions. In the second quarter where there any transaction related expenses that have not been disclosed or backed out. I didn't see that?

Patrick Talamantes

No. The answer to that is no.

Avi Steiner - JPMorgan

And then on the cost guidance you gave for the balance of the year, was that x investments in any other fee-for-service adjustments that we should be aware.

Patrick Talamantes

It was inclusive of investment activity. So our ongoing investments in digital infrastructure and new product, it's inclusive of that. It's exclusive of the fee-for-service adjustment. So it's the equivalent essentially of that down two here in the second quarter.

Operator

Your next question comes from the line of Michael Kupinski from Noble Financial.

Michael Kupinski - Noble Financial

I just had a couple of quick ones. Patrick, you mentioned that national advertising comps getting easier as you go forward. Are the national advertising trends go up, as we into July or are you just saying that this is moderated?

Patrick Talamantes

The national advertising trends -- well, let me just give them to you. National advertising last year, in the third quarter was down 16.1% and in the fourth quarter it was down 19.2% compared to 9.1% up, those were big changes.

Michael Kupinski - Noble Financial

Right. No, I understand. I was just wondering is this the flavor of your -- the color of your comment in terms of, that the trends are improving, I suppose because of the comps getting dry. I was just wondering if you were indicating that national ads fee was showing some sort of turn.

Patrick Talamantes

I'm not meaning to suggest that we're giving you any real-time color on what's actually going on. What all I was trying to do was to highlight the thing at that the comps do get easier in the second half, which is a relief compared to having to go up against 9% into the prior year, when telecom and banking was doing so much better than they were this year.

Michael Kupinski - Noble Financial

And in terms of all these initiatives that you have in terms of obviously your growth initiatives and digital initiative, was just curious in terms of looking at the compensation expense line, as a percent of revenues that seems to have kind of flat lined? And I was wondering if there is any further structural changes that you might be able to reduce that line item or are we just going to see that item kind of trend more towards whatever direction that revenues are going?

Patrick Talamantes

I think we're at the point now where we are trying to maintain as best we can to pull strength of the organization to help make the digital transformation. And we're doing a very good job of that. Print trends do create challenges as we go through a year, particularly in individual markets that are having a tougher times than perhaps some others are. And so in those cases, individual publishers have to make difficult decisions with regard to staffing levels to try to achieve profitability targets.

And so I think in that sense, we will continue to see modest efficiencies in all areas of cash expenses. And we will continue to try to maintain as much strength as possible as we can in the newsroom, on the sale side and with regard to digital. I think it also suggests that we need to continue to look at the cost of the print side of our business and to see if there are further creative ways we have of trying to reduce expenses further.

And so we're very much engaged in that trying to do so in ways that make sense both for readers and advertisers, not wanting to harm the print product, but maybe kind of rethinking about how we go-to-market on the print side, just like we're rethinking all the time how we go-to-market on the digital side.

Operator

Your next question comes from the line of Bradley Tesoriero with CRT Capital.

Bradley Tesoriero - CRT Capital

I just had a quick question. With news reports suggesting Cars.com is for sale as well, I was wondering if you were able to breakout, at least roughly, its contribution to your revenue in 2013.

Patrick Talamantes

We haven't historically broken that out for you, unfortunately, for what you're trying to do. I will tell you that it's a very important part of our auto revenues, particularly our digital-only auto revenues. So it is a key product for us, but we have not historically broken out that revenue line for our investors.

Bradley Tesoriero - CRT Capital

And then I guess, just one more question, if I could. On the further opportunities for our potential print outsourcing, I know you just announced the deal in Dallas, but is there any other deals on the horizon? How do we think about that in terms cost expenses going down in the future?

Patrick Talamantes

So we did do in addition to the Fort Worth opportunity. We did also buy the Dow Jones production facility in Charlotte, North Carolina. And so we are producing our Charlotte Observer newspaper out of that facility now, as well as printing Dow Jones products out of there. It was definitely a win-win transaction that we've done there, and follows a number of very good transactions and partnerships that we've done, we have Dow Jones over recent years.

There are continuing opportunities that we look at all the time. I think we're, because of my senses, we're probably further along than most newspaper companies as a percentage of the total production plants that we have. I think we're sort of on the tail end of that. But we certainly, at the same time, try to look at those production facilities, where perhaps they're too far away from another newspaper to make that kind of thing work.

We're definitely trying to use those production plants as much as possible to produce other folk's newspaper. I mean probably one of the best places we do that is in Kansas City where we print several newspapers for others. The new Miami production facility, as I mentioned, of the Wall Street Journal partnership we do that there as well. So it goes both ways outsourcing and insourcing. It just depends on the footprint of our production facility in the individual market.

Operator

Your next question comes from the line of Michael Kass with Blue Mountain Capital.

Michael Kass - Blue Mountain Capital

I was just wondering if you could give a little color on your national versus retail relative to Gannett was reported earlier in the week. They similarly reported weak national, attributed some of that to World Cup advertisers, [indiscernible] to the World Cup, but I'm curious, they didn't really reported any weakness in retail that you seem to be seeing. Any reason why you might speculate that that's the case vis-à-vis there for printing orders and publishing?

Patrick Talamantes

First of all, on the national side, I think we have to be careful some times with comparisons between the companies. In our industry, we always seem to have just enough differences that make comparisons very difficult. Of course, in our business, only 7% is national. We don't have a publication, anything like USA today, very national-orientation, not very local retail-centric. And so that hurts the comparisons between the organizations a little bit.

And while I am sure that they had some impact from World Cup, we did not notice any particular impact from World Cup, particularly in that -- I guess, it was like just the last two weeks of the quarter that the World Cup was going on, so we didn't see that specifically. I think it was much more related to tactical decisions made both last year and this year by some of the larger banks and the larger telecom companies.

For us on the retail side, we did have a down stack from related to the Easter switch, so we saw that improvement early in the month. We did see the improvement we expected in trends in the Southeast, where the Southeast has been under snow, for likely much of the first quarter assumingly. And so we did see a bounce back there.

We did see weakness late in the quarter related to department stores, it was weaker category for us, though not all department stores, consumer electronics was a weaker category for us. The office supply merger between -- sorry, Office Depot and Office Max, which has not impacted us for much of the year finally started to impact us as we got through the end of the quarter.

And so I think that's where most of the impact came from, but I will tell you that there are good signs there in retail as well. Food and drug was really only off a couple of percent in the second quarter, and as we track our largest advertisers, really only a handful were responsible for the decline in advertising from the very largest. The rest had a number going up a little bit and some going down a little bit. But the vast, vast majority of the largest advertisers were on net flat, which continues to be a good sign for us.

So I can't really, Michael, pour the differences between our retail business and Gannett. But I do believe that overall our ad revenues did not changed very much quarter-to-quarter. I think they actually did weaken 1 point or so. So I can't get into specificity for you to account for that.

But having said all of that, we're going to work really hard to improve our numbers going forward, improve our performance with retailers, focus a lot even increasingly more on small and medium-sized advertisers, where our ImpressLOCAL products is showing great gains. We are committed more than ever to serve that client base as well, both with print, digital and direct marketing products.

Michael Kass - Blue Mountain Capital

And then I was just wondering if you guys might, I didn't see any in the press release, any kind of summary cash flow information, CapEx, working capital, that kind of thing. Any color you can provide that would help us maybe bridge between EBITDA and cash flow excluding the asset sale proceeds?

Patrick Talamantes

Sure. Elaine, you've got CapEx.

Elaine Lintecum

CapEx was about $5.2 million in the quarter. We did have a very large interest payment, our 2022 bonds that have interest payments in the second and the fourth quarter, so we spend about $44 million in interest payment in the second quarter. And I don't believe the tax payments were unusually large, but there was some tax payments second quarter.

Operator

Your next question comes from the line of Craig Huber with Huber Research Partners.

Craig Huber - Huber Research Partners

The few housekeeping questions please. One, what was your digital-only subs at the end of the quarter and what was that number at the end of the year, please?

Patrick Talamantes

The digital-only subs at the end of the quarter were still just over $35,000. We've had a bit of churn in that number. And with that we're going to have to watch out there, Craig, as they said before, how the digital paywall thresholds impact that number over the balance of the year and we're certainly looking to drive that number higher.

Craig Huber - Huber Research Partners

What was that number six months ago please, do you have that?

Patrick Talamantes

It was only about I think $32,000, so not much difference there.

Craig Huber - Huber Research Partners

So my second question on CapEx. Seriously, what are you budgeting for CapEx this year as you think out the next couple of years? Are there any large one-time projects that we should be aware of, as we try to forecast this?

Elaine Lintecum

Well, second CapEx should be in the $30 million range this year and there aren't any significantly large items next year. That $30 million does include the purchase of the Charlotte, the Dow Jones building, the press that Pat mentioned earlier. So if you back that out, CapEx was closer to the mid-$25 million this year. And we've always maintained that maintenance CapEx is in about the $20 million range. We have it budgeted obviously for next year, but we're not aware of any significant projects.

Craig Huber - Huber Research Partners

And my third question, detail question on newsprint. What was the average price percent change year-over-year and also consumption adjustment for the year and loss to the sale?

Elaine Lintecum

Newsprint prices were down about 1.5% and turns were down at the 10% range.

Craig Huber - Huber Research Partners

And also what is your appetite right now, if it comes to an equity stake in Cars.com comes up for sale. Would you have any interest to potentially to buying that or do you have any flipside interest in selling your Cars.com stake at the right price?

Patrick Talamantes

I think Craig, we've talked about this over and over again the last few quarters, and you know where we are. We like our portfolio of newspapers. We like our digital assets. And yes, we also have financial discipline. And we look at opportunities and see if they make sense for the company, but beyond that I don't think I have anything to add to the great body of work that we have already put out there over the years.

Craig Huber - Huber Research Partners

I guess my other questions are follow-on on Michael. What happened in May and June for your retail advertising, in your outlook here for retail this upcoming quarter? Is there anything else you can add in terms of what you think is really happening with your retail advertising category? Do you think it's economic driven in your markets perhaps or do you think it's and/or face extra pressure from digital? Is there anything else you can help us with there?

Patrick Talamantes

I think it's too early to say. It would be easy if it were a broad based move across all retailers, to say what was happening, but the fact of the matter is that is it's not. So the department store that was down, I think we have a large department store that was up.

Food, if you would have asked us a year or so ago, what's your future with drug store? We would said, bleak. And if you ask us now, every drug store in segment, every major drug store chain with McClatchy in the second quarter was up.

So it's very hard in a period of time for retailers to make decisions about their advertising. And they're trying new things and some times some quarters they will be in, and in some quarters they may not be into the same degree, and so that creates challenges for us.

As I have been with advertisers over the course for the last quarter, and I talked to them about our digital opportunities, they will often push back up a little bit and say, you know for us prints still works. And so we still believe that there is a sizable demand for print with the advertisers, just like there is a very sizable demand with print by readers.

And it's just our job to make sure that we're doing the best job we can for readers and advertisers in all media that that's just the world we're in now. And we're going to have to try that to capture those trends as best as we can as we go along. But if, whether the second quarter performance pertains anything new or different, Craig, based on our analytics, I don't think we've got anything for you on that regard.

Craig Huber - Huber Research Partners

But my last question is if I could. If the revenue trends continue as they've going here for next years say, hypothetically, is it getting harder and harder to take out more cost? I mean do you see on a net basis including the investment spend you're doing as you think out the next few years that you can still take out more cost on a net basis? I mean how hard is this getting for you at this stage, given the cultural concerns you must have?

Patrick Talamantes

It's hard. We're a profitable newspaper company. All of our newspapers remain profitable. We want to and are investing in our digital future. We believe in great journalism. And so we definitely have cost pressures.

And so that's why earlier on the call, I talked about we need to rethink how we approach all of our cost to see if they aren't weighted, that we can get ahead of this a little bit more and improve our profitability to some degree, in part for the benefit of the profitability, but in part so that we have resources to invest in that digital future. So it was hard in 2008, when there were opportunities, it's still hard, but our folks are up with challenge and we just keep moving forward.

Operator

Your last question comes from the line of Phillip Pennell with Mariner Investment Group.

Phillip Pennell - Mariner Investment Group

I guess, expanding a little bit on what you were just talking about. From the standpoint of the MCT joint venture, I mean presumably that was providing some web-based content stories, pictures, et cetera, across your mastheads as well as for other guys that compete with you. I mean what was the thought process behind exiting that?

Patrick Talamantes

I think twofold, that that partnership was the partnership that started many years ago in a very different world. It was very print-oriented at that time. And the partnership has never really been kind of updated. And obviously, the owners have changed over the years, Tru is very different than they have been, and obviously it's not Knight-Ridder any longer, it's McClatchy.

And so we worked with MCT and the people there for a number of years. We had a great relationship with them. You're right. They do provide extensive content to our newspapers and our websites. But as the matter of operation and governance, it really didn't make sense for there to be two cooks in that kitchen any longer.

And so we were able to find a way to exit that partnership and at the same time our papers will contribute content to MCT and we will continue to get content from MCT for a period of 10 years. And so we feel like we've kind of done the best thing for the operation of MCT and its future, and at the same time we've locked in a strong and valuable content for our newspapers and their websites well into the future.

Phillip Pennell - Mariner Investment Group

So will the relationship on a go-forward basis, is that going to be more a less net barter-type system or is it going to be an actual exchange of cash on the revenue and cost side?

Patrick Talamantes

Elaine, do you want to give.

Elaine Lintecum

So for the content that we contribute to MCT, we will get paid cash for it. As it relates to the content that we are using, we will get that content for free. And as a result of that we've established the value of that on our balance sheet in intangible assets that gets amortized into earnings over time, but is a part of the game that we've recorded. So cash exchange, as it relates to the content that we actually provide.

Phillip Pennell - Mariner Investment Group

On a go forward basis?

Elaine Lintecum

On a go forward basis.

Phillip Pennell - Mariner Investment Group

I guess, my other question is, are we at the point now where from a technological standpoint that all of the masked heads on the digital side are integrated across a single platform. I mean has that -- but in this, I guess, addresses more of a cost question on the digital side as oppose to just the print focus on cost. I mean have you gotten to the point where you've effectively optimized from a platform standpoint? Everything that you can get out of this or is there more to go on that, both from a CapEx and optimization reduced marginal cost standpoint?

Patrick Talamantes

Well, it's rather a complicated question, but let me see, if I can get it in parts. And if I don't pick it all up, you should feel free to ask a follow-up. McClatchy has been very forward thinking in terms of how it approached its digital operations for a number of years. So all of our newspapers, products in Knight-Ridder were on one platform, and then when we acquired Knight-Ridder, all of those newspapers went on that same platform.

So we have been fully integrated on the digital side for more than a decade. And so that has helped us to a significant degree. Where we are now is we are upgrading the platform that we are on and trying to continue to both centralize the, which we typically refer to as maybe the news publishing side of that, and move the digital publishing side of that to a different system for producing our various websites and other digital content.

In addition, mobile publishing is a different animal than either print or website publishing. And so we have brought all of that in-house, so that we don't pay third-party providers to do those services, and so we can move more quickly. And I think the most tangible benefit of all of this upgrading that you're going to see is looking at our website over the course of the next year-and-a-half to two years, as we evolve to responsive design websites.

So I think we've done a very good job in the newspaper, The McClatchy Interactive has done a very good job, in terms of being as cost effective as possible, and yet really being one of the very best technology leaders in all of publishing. And so while I don't see any cost upsize, I see a lot of upsize from being on the leading edge of that, being able to come up with new products and services as rapidly as we can. And then just keeping up with changes that happened to all publishers in this kind of a digital world are very, very well. Does that give what you're asking?

Phillip Pennell - Mariner Investment Group

I think it's more or less. I mean, I guess the question that I have is, you've integrated all the platforms, be it mobile, web for the print and/or digital. Then when you push a specific ad campaign, let's say for a local merchant and Fort Worth, and it goes through the Star-Telegram, and it hits the web and it hits mobile, the same thing effectively, you just make one push and it goes out to all three channels at the same time seamlessly, is that the plan?

Patrick Talamantes

No. That's the reality.

Phillip Pennell - Mariner Investment Group

And I guess that's a segue to my final thing, which is kind of looking at where you need to have digital growth, and this relates back to several questions that have been asked on the call. Digital growth, to get to that crossover point, and this is not just with you guys, this is with anybody using print and digital at the same time, and print shrinking faster than digital is growing obviously.

Given that you get advertising spending, basically grows the GDP and that's pretty much well accepted, it's just a question how a pie split now, and you guys have kind of three of the five, if you consider audio and video outside the scope of what you do. Where does digital have to be to basically get topline growing, again, on a consistent basis?

Patrick Talamantes

Well, it's hard to know, because in part it depends on what the overall trend decline might be in print. And so right now it seems like it's a very high trend decline based on just this quarter's performance. I think if you look back a year ago, it would not have been where it is today. So you can run those numbers. I mean, right now, our traditional print advertising is a percentage of total revenues. It's a little less than 40%.

And so you can make some assumptions about each of our revenue categories. And I think probably do that math to some degree for yourself. We're fairly upbeat about our ability to continue to grow digital-only in the double-digits and direct marketing in the low-single digits, where we expect to be able to grow the circulation revenues over the course of time.

Of course, we'll have quarters that may be negative and other quarters that will be positive, but we expect it to be able to grow it albeit slightly over time. And so I think you can do that now and come up with what your view is of it. But I think that crossover point is not decades away, but it's closer than that and it just depends on things like how fast we can grow digital and what the print decline is like.

I would encourage you to not to think of us as not having video. We do think that that is a significant opportunity for us. As we move forward, the visual web is an important facet of digital publishing these days, and we are a part of it, but we can be part of it in more significant ways, and we'll be working on that, as the years go ahead.

Operator

There are no further questions in queue. I will turn the call back over to the presenters.

Patrick Talamantes

Thanks everyone. I know it's a busy earnings season. Thank you for your time. And we'll see you on the next call.

Operator

This concludes today's conference call. You may now disconnect.

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