Valassis Q2: "We Have Hit Bottom," Says CEO Schultz; Legal Bills 23% of Profits

Revenue at Valassis Communications was down across all its segments except the one that the agency is cutting: newspaper coupons. Total revenue at Valassis in Q2 2009 was $544 million, down 8.6 percent; net income was $16 million, up 141 percent.

But look at the breakout of Valassis' business segments:

The only area showing revenue growth, and the biggest profit-grower, is "free-standing inserts," or newspaper coupons as they're known in the real world. Yet newspaper coupons are the one area that Valassis has pledged to get out of, citing declines in circ and penetration. Valassis recently pulled out of the Deseret Morning News and Salt Lake Tribune in Utah, sparking protests by coupon-cutters there.

Valassis has lost about 18 percent of its total quarterly revenue from the peak of Q4 2007. CEO Al Schultz told analysts:

While we don't have a crystal ball on the economy, we do believe that the worst of quarterly revenue declines is behind us.

... we have hit the bottom from a rate of decline in revenue.

Schultz opened the conference call by announcing that he would not answer questions about the one thing everyone wanted to ask him about: What's going to happen with the $300 million verdict Valassis just won against News America Marketing? Some asked anyway:

Dan Salmon - BMO Capital Markets: So, maybe I don't know if you feel comfortable with this, but maybe frame how you are looking at using your free cash flow, where you stand today and then perhaps if ultimately the News America litigation settles where it looks like it is today with considerable amount of cash coming to you.

Schultz: As far as proceeds from the litigation with News America go, obviously we're talking about very substantial dollars there and I think that would require us to reconsider exactly what we do with any of those proceeds and that ultimately would be a board decision and its something that we have had some conversation about, but its not something that we've made any firm decisions on at this point.

Unidentified Analyst: I'm dying to ask about your litigation, but I won't. But are you allowed to say, at what rate the interest is it accrued on?

Schultz: Yes. I don't know. I don't recall exactly what it is, but it seems it's in the neighborhood of 4.5% to 5% to somewhere around there and its 1% over some particular benchmark. I don't recall exactly what that benchmark is, but it seems like it's in that. Let's call it to be safe in the 4% to 5% range.

Schultz confirmed that the award was taxable.

That $300 million is a big payoff for Schultz's gamble that decimating his net income with legal bills would be worth it. Q2 legal bills were $3.7 million; $6.6 million across the first six months. Put another way, the legal bills were fully 23 percent of this quarter's entire profit.

Final thought: I'm pretty sure that God has better things to do than pass judgment on the coupon business, but wasn't it spooky that there was a blackout right in the middle of the call? After plunging into silence, Schultz got onto his mobile:

Hello, this is Alan Schultz returning to the call. I apologize. We had a power outage here at our office. So I'm on my mobile, hopefully it comes through clear.

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