Just as Chicagoans have been waiting and waiting for spring to finally break through, investors in Playboy Enterprises Inc. have been waiting and waiting for the adult entertainment company to emerge from its three-year bath in red ink.
And now, as strategic initiatives launched in the past year start to pay off, among them a move into explicit pay TV offerings and sharp cost cuts in bleeding online operations, top executives at Playboy say a turning point is at hand.
Sitting in her glass-walled office in the company’s airy, art-filled headquarters on Lake Shore Drive, Chairman and Chief Executive Christie Hefner said the company founded by her father, Hugh, in 1953 has reached “a kind of inflection point year.”
“Our goal is to create an operating profit for the company for the year,” she said. “And if the business performs as our plans are, we will achieve that.”
The company projects that the fast-growing entertainment division will stay hot, the struggling online division will reach a break-even point, the sluggish publishing division will eke out a profit and the licensing operations will increase profitability.
Will this turnaround play out as the company hopes?
Observers aren’t so sure. They’ve watched the company shift gears over the years, plunging into casino gambling, only to exit swiftly; shunning hard-core content, only to jump in later at the urging of cable television services. And they’ve watched as splashy initiatives, such as a dive into online entertainment, failed to produce anything but a load of debt as some rivals made money. Still, a number of observers like what they’ve been seeing lately, while acknowledging that risks remain.”I think they should make it if everything goes as planned, but with them, when it looks like it’s going fine, something else happens,” said Robert Routh, senior analyst with Arnhold and S. Bleichroeder Inc. and one of only a handful of analysts following the stock, long shunned as a “sin” stock by many mainstream money managers.
“They have a plan, and they need to stay with it. It may take a year or two,” Routh said. “They are showing signs that that’s what they’re doing. But when there are bumps, they get distracted, management changes, and it’s back to the drawing board.”
Company executives reject the notion that there have been missteps or flip-flops in direction, saying the company has been on a steady strategic course to transform itself from a magazine publisher to a multimedia adult entertainment company–a move they say is paying off handsomely in the realm of pay television and should start to pay off in online operations later this year.
“Our strategy has been the same for a really long time … to grow our electronic media,” said Martha Lindeman, senior vice president for corporate communications and investor relations.
This month, the stock price has headed upward after the company reported improved results for the first quarter ended March 31. Still, its closing price of $14.20 on Friday on the New York Stock Exchange remains a far cry from its peak of $33.43 in April 1999.
Yet Christie Hefner argues the stock is ready to shoot up when online reaches profitability.
Since collapse of the dot-com scene, “it’s become a case of investors really wanting to sit on the sidelines until you can show that you have achieved profitability in online,” she said. “Once that happens, I think then you get companies really being lionized in terms of the multiples that they’re trading at.”
On May 10, Jeffrey Hoskins, media/entertainment research analyst with Gerard Klauer Mattison & Co., initiated coverage of Playboy, labeling the stock “outperform” and setting a 12-month stock price target of $21.
The launch of coverage was significant for a thinly traded company with a market capitalization of $360 million. Many of its shares are held by large institutions and by founder and Playboy incarnate Hugh Hefner, who owns 24.5 percent of the common stock and controls 70 percent of the voting power.
More adult offerings
Hoskins sees two main strengths.
First, Playboy’s acquisition of three hard-core, pay-per-view television networks last July “put the company in a much better competitive position,” he said.
The rollout of digital cable has meant cable providers can offer more channels to customers, including more X-rated channels like Playboy’s newest acquisitions, Hot Network, Hot Zone and Vivid TV.
Hoskins’ second reason for initiating coverage had to do with Playboy.com, the online business that was to have gone public before the dot-com bubble burst. It has lost $56 million over the past three years.
“In the online group, there has been a significant head-count cut, and quarter-over-quarter growth in revenues,” he said. “With a bit of luck, I think the company probably can show some low level of profitability or break even by the fourth quarter, and full-year profitability by 2003.”
Analysts point to fast subscription growth for Playboy Cyber Club, the company’s online offering that’s similar in tone to the magazine and costs $9.95 a month. As of March 31, it had 118,300 paying subscribers, up 51 percent from a year earlier.
Early this year, the company also launched a raunchier subscription site, spicetv.com. It hasn’t released numbers yet on that site, where subscriptions cost $24.95 a month.
“It did cost a lot to get up and running, but it’s one of the few soon-to-be-viable business models in cyberspace,” Hoskins said.
Still, hefty investments in the entertainment and online divisions have left the company with $78 million in long-term debt, which represents a 49 percent long-term debt-to-capital ratio at year-end, Hoskins said. He thinks the company can meet its obligations in the near term, but may have to roll over its long-term debt or make an equity offering in 2004-2006.
The debt level “is troublesome if cash flow doesn’t improve going forward,” said David Leibowitz, managing director at Burnham Securities, who is among the optimists that this year will be a turning point for the company.
Another concern centers on the fast-growing international television business, which accounted for nearly 6 percent of revenues last year, which were $291.2 million, down 5 percent from 2000.
Playboy’s joint venture partner, Buenos Aires-based Claxson Interactive Group Inc., is in dire financial straits, throwing into question whether it can make required payments to Playboy. A default by Claxson could hurt in the short-term, but experts said it could lead to a bigger equity stake in the venture for Playboy, which could boost results over the long haul.
A conservative approach
For a company that built its reputation on being groundbreaking and ahead of its time, Playboy has been criticized for taking so long to craft a viable online business, though some analysts praise its go-slow tack.
The company also is taking a conservative approach to its recent entry into online gambling, which is available only to customers outside the U.S. where online betting is legal, though analysts question the value of the foray.
“Anybody and his mother can get a license to do it, so why should a customer go to Playboy?” said Routh.
Observers also don’t see much growth potential for the flagship Playboy magazine. But they give the company credit for holding its ground in the face of aggressive competition from feisty, fast-growing upstarts, like Maxim and FHM.
“You reach a point where you’ve got established DNA, and any way you mess with it will hurt,” said Samir Husni, professor of journalism at the University of Mississippi at Oxford. “So a hands-off approach is the best thing for them to do.”
Others, including Routh, think the company needs to be more proactive, reaching out to a younger audience to avoid being the magazine version of “my father’s Oldsmobile.”
Michael Carr, president of the Playboy Publishing Group, says the magazine is in a position of strength, and is taking innovative approaches to ad sales and newsstand display.
“Any new publication with some appeal will have an enormous rise if it starts from zero,” he said. “But we measure success in decades, not issues.”
