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Cruise business, ad declines sink PlanetOut
Cruise business, ad declines sink PlanetOut
by Matthew S. Bajko - Bay Area Reporter

PlanetOut, the nation's largest LGBT media company, is sinking under the weight of falling ad revenues, online subscription declines, and a cruise business mired in management mishaps.

As of March 31, 2007, the San Francisco-based company had an accumulated deficit of approximately $45.2 million. It suffered a net loss of $3.7 million for the year ended December 31, 2006 and a net loss of $6.9 million during the first quarter of 2007.

"We've got major work to do at PlanetOut," Karen Magee, PlanetOut's chief executive officer since last July, told analysts and reporters during a conference call Wednesday, May 9. "To complete that work and regain the confidence of the market will take time."

Magee predicted it would take anywhere from 12 to 24 months before the company began to shed the problems it has faced since it went on a buying spree in 2005, acquiring the RSVP Vacations cruise business and LPI Publications, publishers of Out, OutTraveler, and the Advocate, as well several pornographic magazines under the Specialty Publications brand.

Numerous problems vex the company. It announced this month it had defaulted on a loan agreement with its financial backers and needs to raise $15 million by August. Its stock price tumbled last week to its lowest level ever, $1.45, but climbed slightly to $1.62 by this week.

"The company made mistakes in the last three years. The ramifications are deep, and only now, are perfectly clear to us," said Magee.

The company's total revenue was $16.8 million in the three months ended March 31, 2007, a decrease of 5 percent from total revenue of $17.6 million in the three months ended March 31, 2006. PlanetOut executives said the revenue drop-off was primarily due to a reduction in online subscribers to its Gay.com Web site and a decrease in sales on its online shopping sites such as http://www.Kleptomaniac.com.

"We have experienced significant net losses and we expect to continue to incur losses in the future," said Magee. "We may not be able to regain or sustain profitability in the near future, causing our financial condition to suffer and our stock price to decline."

In its filing for the first quarter with the Securities and Exchange Commission, the company said it was "aggressively exploring all possible financing and strategic alternatives, including equity or debt financings and corporate strategic transactions."

MANAGEMENT SHAKEUP The dismal economic report comes as several senior executives have resigned and Lowell Selvin, the company's longtime CEO, who stepped down last June for health reasons, also plans to leave the board this summer. Its chief technology officer has also since departed, and this March, Jeff Soukop, the company's president and chief operating officer, left, costing the company $700,000 in severance.

Soukop declined to comment because he is not allowed to discuss the company.

PlanetOut said it has hired Allen & Co., an investment banking firm, to assist the company as it raises needed cash, but it also warned that it may not be successful.

"There is no assurance that we will be able to enter into a strategic transaction or raise additional capital adequate to meet our operating needs and to comply with the terms of the loan agreement," said the company in its filings.

In an effort to raise cash, the company is selling its adult division, Specialty Publications, which publishes Unzipped Monthly, Men, and Freshmen magazines, and includes other properties such as BuyGay.com and Unzipped Video.

"It is a profitable one for us," said Magee. "With that said, the adult business does not fit going forward with our other media properties."

Nor did the company rule out selling other portions of its brand, such as the troubled RSVP Vacations cruise line division, or pursuing a wholesale buyout of the company.

"I cannot discuss it anymore, other than to say we are looking at all options," said Magee.

Analysts who ballyhooed the initial merger of PlanetOut with LPI have since soured on the company's prospects. JMP Securities analyst William Morrison advised investors last week the company could run out of cash by the end of the year and to "refrain from new capital to work in LGBT [PlanetOut's stock symbol] until we see evidence that its turnaround plan is working and the company raises additional capital."

Media experts said PlanetOut's problems do not reflect a more general downward trend for the broader Gay media market. Instead, they saw the company's decline as having more to do with poor leadership.

"It may just be a sign of bad management at the company. It should not indicate anything about the Gay market more broadly," said Katherine Sender, Ph.D. an expert on Gay media at the Annenberg School for Communication at the University of Pennsylvania. "It would be tempting to say this is a mess because there are not enough ad buyers or people are not interested in the Gay market anymore. But I don't think it is that; it sounds like it is a management issue."

Bob Witeck, the owner of an LGBT-focused marketing firm, also sounded a positive note on advertiser interest in LGBT publications despite PlanetOut's problems.

"Actually, we do not see a significant impact on national marketers per se, since there has been accelerating and competing growth among other forms of media and entertainment properties, including Logo (both cable and online platforms), Bravo television, new social network sites such as OurChart and Glee to name two, and more properties from Here! that are advertising-based," wrote Witeck in an e-mail. "I understand also that across-the-board, ad revenues for all U.S. Gay print media have increased year over year, though I suspect the real growth in marketing dollars logically will continue to be online. That trend is global, not just in the Gay community."

While Sender said PlanetOut's acquiring other media platforms made sense, its buying of RSVP makes less sense, especially when the cruise line is a major advertiser in Gay publications. Though she added that the media buys also appear not to be generating increased ad pages from companies not owned by PlanetOut.

"It seems a little odd for them to open a travel company as well," she said. "I think a real good question is if revenues are coming in from external advertisers. I know the magazines are full of Gay.com and PlanetOut ads as well."

She said the best solution for the company would be to shed its cruise business and focus more on its Web portals.

"I would hope PlanetOut deals with its management issues, divests itself of RSVP - which sounds like a nightmare - and concentrates on its online properties, which is what is does best," said Sender.

Writing on his blog, Chris Crain, formerly with Gay media company Windows Media and editor of the Washington Blade , said despite any misgivings about the company's editorial direction, he hoped PlanetOut turns itself around.

"Whatever you think of PlanetOut and its shifting focus and publishing standards at the Advocate and Out magazines, the failure of the first-ever publicly traded Gay business would be a blow to others who hope to repeat PlanetOut's early success," wrote Crain. "Its two marquee print titles have already shown marked improvement under new editors since the departure of corporate editorial director Judy Weider. PlanetOut has already survived the dot-com bust; it would be a shame if it petered out now."

Magee said the company is taking "some major steps" to generate the positive revenue growth and solid earnings performance it needs. But she insisted it would not happen overnight.

"To complete that work and regain the confidence of the market will take time," she said. "Without question, our business model is in transition."

Executives laid blame for some of the problems besetting the company to the migration of Gay men to free online chat and hookup sites such as http://www.adam4adam.com and http://www.myspace.com, and to the closure of Gay bookstores, resulting in decreased newsstand sales of its magazines and books.

It warned shareholders that while revenue is expected to increase this year, operating losses will continue to accrue due to additional expenses for the development and expansion of its Web site properties; increased market research and marketing campaigns; and the discounting of cabin prices combined with occupancy-related penalty charges on its transatlantic cruise aboard the Queen Mary 2, set to sail from New York to London on May 29.

The cruise portion of its business continues to be a drain on the company's bottom line. It has already taken a $700,000 hit on the QM2 cruise in costs that executives have determined will exceed the anticipated revenue of the event.

It recorded more losses as a result of greater than expected cabin price discounting of a Caribbean cruise this winter, due primarily to the late initiation of marketing activity for the event, executives said.

"RSVP is responsible for the most significant variance of our profit," said Magee. "Our marketing efforts have been too little too late and we underestimated the challenge of booking a transatlantic ship."

The company has invested $7.2 million as down payments for its upcoming cruises, with deposits from customers at $6.6 million. It has brought on Rob Pritchard to be director of operations of RSVP Vacations. But Magee said if the cruise business does not show signs of improving by the fall the company would halt its 2008 cruises.

While Magee acknowledged that "we bit off too much too soon" in regards to the cruise business, she remained bullish on the purchase increasing PlanetOut's revenue stream. "This should not be a hard business to manage well," she said. "I am confident RSVP can be a solid profit and cash generator for PlanetOut."

This article first appeared in the May 17, 2007 edition of the Bay Area Reporter. It has been reprinted here with permission.



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