Graham Holdings (NYSE: GHC) has gone through some turmoil in recent years. The Kaplan education business has suffered from criticism of for-profit educational institutions in general, prompting the company to contribute many of its assets and operations to a new nonprofit. Yet it's easy to forget that Graham also runs other businesses, including television broadcast operations that have exposure to the general health of the media industry, as well as to conditions specific to the locations in which each station operates.
Coming into Wednesday's third-quarter financial report, Graham Holdings investors were focusing most of their attention on the Kaplan unit. As it turned out, the broadcast segment had a lot more news to digest and had a larger impact on the overall company's results. Let's take a closer look at how Graham Holdings did and what's ahead for the company.
Graham deals with stormy times
Graham's third-quarter numbers continued the downward trajectory in profits that the company has endured recently. Revenue was up 6% to $657.2 million, which was consistent with how Graham did in the second quarter. Once again, though, the bottom line suffered, with net income falling by a quarter to $24.8 million and producing earnings of $4.42 per share. That was down from $5.87 per share in the year-earlier quarter.
Graham's broadcast division had the biggest issues to overcome. Segment revenue fell 10%, and a rise in operating expenses of more than $15 million sent the unit's operating income down by 44%. Part of the drop was due to the fact that the company's NBC affiliates benefited in 2016 from showing Summer Olympic content that wasn't present in 2017. Less political content this year than last also affected revenue, while the displacement of advertisements by news programming coverage of hurricanes Harvey and Irma in the Texas and Florida markets cost the company $2.1 million in revenue and also added roughly $600,000 in extra expenses. Higher network fees for two of the company's newest stations also weighed on performance.
The Kaplan unit had its own challenges. Revenue was down 3%, leading to a nearly one-fifth drop in operating profit. The international program was the only big winner for Kaplan, with profit more than tripling on a 7% rise in revenue. By contrast, the higher education and test preparation businesses suffered substantial revenue declines and saw part of their profits disappear. New enrollment at Kaplan University was down 8% in the third quarter, and total students fell 12% to just under 30,500.
The catch-all other businesses segment posted the best sales performance. Revenue jumped by nearly half, but the unit kept losing money, albeit as those losses narrowed by more than a third. With its exposure to a social media market solutions company, several manufacturers, two online publishing companies, and a home health and hospice services provider, Graham is a true conglomerate.
What's ahead for Graham Holdings?
Kaplan is still the business that has the most potential to add to or detract from Graham's overall performance. Many students still turn to Kaplan products as they prepare for educational endeavors, and the company's views on the admissions process and dealing with testing issues are still quite valuable. Evolving to deal with the changing way that students get their education will be critical for Kaplan, and Graham needs to emphasize making its strategy for Kaplan as clear as possible so that investors can understand what the future could bring.
Graham's broadcast business, meanwhile, will have to overcome difficulties throughout the industry. The shifting landscape that cable cord-cutting has brought even to the traditional broadcast world has made it hard for media companies to keep up, and Graham will have to stay ahead of the curve in order to milk the most money from its broadcast assets.
Graham Holdings investors seemed to take the results in stride, with the stock showing only modest changes following the earnings announcement. In the long run, what happens with Kaplan will define the future for Graham -- at least unless it finds a different strategic direction in which to go.
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