Boy, if I didn’t grab your attention with that headline, not sure I ever can. 

My question, in fact, is: is there a need for a gay-oriented media company? 

A couple of years, for no other reason than being bullish on online advertising and recognizing that the gay/lesbian market was probably inderserved, I bought a few hundred shares in PlanetOut.com, “the leading global media and entertainment company exclusively serving the lesbian, gay, bisexual and transgender (LGBT) community.”  The company has over the years acquired digital and offline assets and diversified quite a bit, but retains its focus on the LGBT market, according to its corporate website:

PlanetOut’s digital media brands include Gay.com, PlanetOut.com, OUT&ABOUT Travel, Advocate.com, Out.com, OutTraveler.com and HIVPlusMag.com, as well as localized versions of the Gay.com site in English, French, German, Italian, Portuguese and Spanish. PlanetOut print media brands include The Advocate, Out, The Out Traveler and HIVPlus, as well as SpecPub, Inc. titles. Transaction services brands include e-commerce Web sites Kleptomaniac.com and BuyGay.com, travel and events marketer RSVP, book publisher Alyson Publications, and direct marketer Triangle Marketing Services, among others.PlanetOut, based in San Francisco with additional offices in New York, Los Angeles, Minneapolis, London and Buenos Aires, offers Global 1000 and local advertisers as well as its own properties access to what it believes to be the most extensive multi-channel, multi-platform network of gay and lesbian people in the world.

The company was worth $200M or so when I got in, and iVillage had just fetched $600M from NBC while IGN had sold for $650M to News Corp., to me the leader in the LGBT should be in the same ballpark.  Obviously, I was wrong.  Maybe, the company just dropped the ball. 

I presumed that anyone operating in online advertising - with a position of leadership in their sector - should see a rise in revenues and an appreciation in market value.  After a couple of very weak quarters, the stock slid to $8 and with no end in sight, I cut my losses and got out of the stock.

Today it’s trading at less than $2 per share; the stock fell 30% after its most recent woeful quarter, and today is down another 5%.    The market value of the company with $69M in revenues in 2006 is a paltry $28M, and according to Yahoo! Finance, it boasts $11M of cash and $19M in debt, for an enterprise value of $38M.  Of course, it lost $5M in 2006 and losses increased in Q1 2007.

According to its most recent press release after releasing Q1 2007 figures:

“We are taking some major steps to generate the healthy revenue growth and solid earnings performance that we believe this company is capable of producing,” said Karen Magee, chief executive officer, PlanetOut Inc. “To complete that work and regain the confidence of the market will take time. 

Now what’s really interesting is that the company acquired a lot of magazines, and in turn, revenue by way of that deal.

Initially, the company stood out because it was one of the few new media companies that generated more revenue via e-commerce, transactions than online advertising.  Despite the stigma attached to advertising to gays (not that there is anything wrong with being gay, of course, but it’s a fact that many companies unfairly don’t want to go there because of the repercussions of a vocal minority), I was convinced that any team can execute a business plan, maintain their e-commerce revenues, leverage their print advertiser relationships and boost online and offline ad sales.

Yet, the opposite is happening, the company’s costs are as high as ever and the revenues are stalling and even falling in some units; yet online advertising is soaring and advertising to gays is probably more acceptable than ever (again, if my wording is inappropriate, I do apologize, I’m commenting on others’ bias, prejudice and fear).

First-Quarter Financial Results

Revenue — Total revenue for the first quarter of 2007 was $16.8 million, down 5 percent compared to $17.6 million for the same period one year ago.

Advertising services revenue for the first quarter of 2007 was $5.3 million, equal to the $5.3 million for the first quarter of 2006.

Subscription services revenue for the first quarter of 2007 was $5.6 million, [down from] $6.3 million for the first quarter of 2006.

Transaction services revenue for the first quarter of 2007 was $5.8 million, down from $6.0 million for the same quarter a year ago.

The company’s market cap is now at $28M, and I wonder, does media need to be gay?

I mean, companies like BET, BlackPlanet.com etc. have built fantastic franchises by targeting to a race-based demographic.  Indeed, I can see how music, fashion and many lifestyle interests need to be fine-tuned for a Black audience, even though many other categories of information need not be.  Of course, it could be argued, that even things like health and travel need to be tailored, given racial dispositions and points of interests respectively.

But, again, does media need to be gay?  Sure, employment, health, dating and travel need to be tailored to a gay audience to some extent, but does that mean that a gay audience will really flock to a site because of it.

Before you think I’m talking out of my derriere, you should know that my old job was being spokesperson and VP of ad sales for one of the largest men’s magazine where our gay readership was as low as 10% and as high as 33%.  In fact, it could have been more, in some sections like Fashion.  We consistely got inquiries about why we didn’t publish gay-oriented content.  I thought it was odd, but I did understand the needs of a gay readership in the aforemention areas being different.

In fact, as I write this post, I start to think that the need for a gay-oriented media company is greater than ever, and maybe, despite their noblest attempt, the problem lies with the business plan or the management team in place.

Apparently, I am not alone.

“The tremendous promise represented by our businesses and the market, we believe, is as solid as ever,” Magee said. “But without question, our business model is in transition. We need to identify the areas with the most significant growth prospects for us, be clear about our objectives, and streamline the rest of our business to enable us to focus our resources and talent on those opportunities which we believe will return the most value to our shareholders.”

At a time when online media businesses are scorching, demand for audiences are great and interactive advertising revenue is increasing, is LGBT wasting a golden opportunity to do built a valuable franchise?

Also, at a time when even successful new media companies like 24/7 Realmedia are contemplating strategic options, should LGBT remain independent or should it consider selling?

There are many options, including a private acquisition that can maybe cut costs and boost ad sales.   Of course, in terms of a sale, there are many suitors who could use the $69M in sales, could cut costs and increase sales quite a bit.

A Breakdown of Revenue and Costs by Segment is Revealing

Naturally for a company that generates $3.4M out of $5.3M in advertising revenue from publications vs. online, you have to be careful about kind of P/E multiple you project it, especially when there are no “earnings” to speak of.  In that case, the P/S is very low, in line with print and not online media companies. 

Furthermore, you see that a major drain on funds is a “travel and events” unit.  All right, why not get rid of that then?  Is it strategic?  Does it serve shareholders?  I’d say it does not, even though travel is a strategic part of serving the LGBT market, but you get my point…

But who would buy?

You can think of major media companies like CBS, Viacom, NBC Universal, News Corp. (don’t laugh, Mr. Murdoch is after the almighty buck more than anything else, though we don’t see this one happening) and Time Warner seem like natural fits.  LGBT has the audience, after all, it just needs a fine-tuning.

In fact, in light of LGBT’s acquisition of a suite of magazines, would it not be a clever way for an old media magazine company to acquire it, generate savings with its own magazine operations, and then leverage LGBT’s online audience to funnel traffic to its magazines’ websites.  Think about it, if you look at it this way, a gay reader would also (if they don’t already) read magazines and probably enjoy those magazines’ websites, no? 

In that sense, LGBT is an attractive option for new and old media companies who could gain a foothold in the LGBT market and market their “straight” titles to a readership with high disposable incomes and what not.  All of a sudden, the options expand to include players like Hearst, Meredith, Conde Nast, etc.

At a market cap of $28M, would you buy the company that is in a leadership position in its space?

I’m going to give it some thought this weekend.  But a Venture Capitalist once said that he never looks at the business plan or financials.  He simply looks at the quality of the team.  According to him, a good team can fix a bad business plan.  I do not know any one of the management team members, nor have I seen the business plan, but I do see the financials. 

Would I invest in the company?  I don’t know. 

Disclaimer: please note that at the time of this writing I have absolutely no position in the stock but I might buy some shares in the weeks to come.  Of course, if I do, I will disclose it on this site and add a mention to this post.  If you do not see any mention on this post and happen to read it in the future, you can rightfully assume that I hold no shares in LGBT.

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