YNOT EUROPE – During 2009, internet sales increased enough to allow Barcelona-based Private Media Group to show year-over-year growth despite a decrease in profitability due to flagging sales in physical product, broadcasting and wireless, according to the company’s annual report.

“For the year ended Dec. 31, 2009, we reported net sales of EUR 23.1 million compared to EUR 19.7 million for the year ended 2008, an increase of EUR 3.4 million, or 17 percent,” a prepared statement noted. “The increase was the result of increased internet sales offset by decreases in sales of DVD and magazines, broadcasting and wireless.

“Internet sales increased EUR 8.9 million to EUR 13.1 million, which represents an increase of 211 percent compared to the same period last year,” the statement continued. “The increase in internet sales was the result of the acquisition of GameLink and Sureflix which contributed EUR 10.2 million and was offset by a decrease of EUR 1.3 million in our prior internet business. The decrease in the prior internet business was the result of a complete reorganization of this business as a result of the rebuilding of the Private websites.”

Also of note in the report: Broadcasting sales decreased EUR 1.3 million, or 23 percent, to EUR 4.5 million, primarily as a result of a decrease in cabin royalties and title sales, offset by increases in TV-channel and video-on-demand sales via internet protocol TV (IPTV) and cable. Wireless sales during the period decreased EUR 0.4 million, or 18 percent, to EUR 1.6 million as a result of a reduced share in consumer spending provided to aggregators and content providers by the telcos.

DVD and magazine sales decreased EUR 3.8 million, or 50 percent, to EUR 3.8 million. The reduction in DVD and magazine sales was primarily attributable to an industry-wide decrease in DVD sales, Private’s annual report noted.

“Overall, net sales and margins were affected by the current state of the world economy and the impact of free adult content on the internet,” according to the prepared statement. “Going forward, we expect internet, wireless and broadcasting sales to increase.”
Costs also increased during 2009.

“Our cost of sales was EUR 16.9 million for the year ended Dec. 31, compared to EUR 13.5 million for the year ended 2008, an increase of EUR 3.4 million, or 25 percent,” according to the statement.

Included in cost of sales is internet, broadcasting and wireless, printing, processing and duplication, and amortization of library. Internet cost was EUR 7.3 million for the year ended Dec. 31, 2009, compared to EUR 1.2 million for the prior year. Internet cost as a percentage of related sales in the period was 55 percent, compared to 28 percent in the same period last year. The increase of EUR 6.1 million was primarily the result of the acquisition of GameLink and Sureflix, which contributed EUR 5.4 million to the company’s bottom line.

“In addition, we are rebuilding our Private.com membership site, and as a result of this we have incurred increased costs, including accelerated amortization of EUR 0.2 million of the old site, which [was] decommissioned in May 2010,” the company stated.

Broadcasting and wireless cost was EUR 0.6 million for the year ended Dec. 31, 2009, compared to EUR 0.6 million for the previous year. Broadcasting and wireless cost as a percentage of related sales in the period was 10 percent, compared to 8 percent in the same period last year.

Printing, processing and duplication cost was EUR 3.1 million for 2009, compared to EUR 5.4 million for 2008, a decrease of EUR 2.3 million, or 42 percent. The decrease was primarily a reflection of the decrease in sales offset by a 50-percent write-down of the company’s magazine inventory. Printing, processing and duplication cost as a percentage of DVD an magazine sales was 81 percent during 2009, compared to 70 percent in 2008. Amortization of library was EUR 5.8 million for the year ended Dec. 31, 2009, compared to EUR 6.3 million for the year ended Dec. 31, 2008, which represents a decrease of EUR 0.5 million. Amortization of library does not vary with sales, since it reflects the amortization of the company’s investment in content that has been available for sale for a period of three to five years.

“In the year ended Dec. 31, 2009, we realized a gross profit of EUR 6.2 million, or 27 percent of net sales, compared to EUR 6.2 million, or 31 percent of net sales, for the year ended Dec. 31, 2008,” the company’s statement noted. “GameLink and Sureflix contributed EUR 4.8 million, which was offset by EUR 4.8 million in reduced gross profit from our other lines of business.”

Discounting the effect of newly acquired companies and non-recurring expenses, the company reduced selling, general and administrative expenses by EUR 2.6 million. Overall, selling, general and administrative expenses included EUR 9.5 million of non-recurring expenses composed of provision against related party receivable of EUR 7.3 million, investment write-off of EUR 1.0 million, expense related to closing down subsidiary of EUR 0.6 million and acquisition-related expenses of EUR 0.6 million.

Private reported an operating loss of EUR 18.6 million for the year ended Dec. 31, 2009, compared to an operating loss of EUR 6.9 million for the previous year. The increase of EUR 11.7 million in operating loss was the result of the increase in selling, general and administrative expenses.

The company also reported a net loss of EUR 20.5 million for the year ended Dec. 31, 2009, compared to EUR 5.2 million for 2008. The increase of EUR 15.3 million was primarily the result of increased selling, general and administrative expenses, including EUR 9.5 million of non-recurring expenses and a difference in deferred tax of EUR 3.5 million.

In contrast to the 2009 loss, the company reported EUR 3.3 million in net cash provided by operating activities for the same period.

“In each of the past three years, we have experienced losses from operations,” the company noted in its statement. “As a result of our operating losses, our independent registered public accounting firm has concluded that there is substantial doubt as to our ability to continue as a going concern, and have modified their 2009 report in the form of an explanatory paragraph describing the events that have given rise to this uncertainty.”

However, Private — which is publicly traded — has a plan to meet its financial obligations and attain profitability. Among the company’s objectives for 2010 are to roll out new internet, mobile and e-commerce platforms; restructure affiliate programs for all properties; release more content to cable and IPTV platforms; consolidate and restructure operations, and outsource non-cost-effective parts of its operations. Private did not reveal which parts of its operations would be outsourced.