Profit on the docket: legal publisher Daily Journal bucks industry trend by mining lucrative niche.

GERALD Salzman, president and chief executive of legal publisher Daily Journal Corp., is one of the few newspaper owners these days who isn't crying about declining profit margins.

A niche publisher of flagship legal newspapers in Los Angeles and San Francisco and of California Lawyer magazine, the Daily Journal has managed to produce solid journalism while throwing off double-digit profits, bucking current trends in the newspaper industry.

At a time when daily newspapers are taking radical steps to boost profits--such as shrinking paper size and putting advertising on the front page--the Daily Journal appears to be succeeding by sticking with its legal niche.

The company posted a 35 percent pre-tax profit of $2.6 million for its publishing business in the six-month period ended March 31. Circulation in the same period fell three percent.

"I don't think there is a silver bullet for the industry," said Salzman, 67, who bought the Dally Journal in 1977 when he was assembling an investment portfolio for Charles Munger, vice chairman and director of Berkshire Hath away Inc., who is also chairman of Dally Journal and heads Pasadena-based Wesco Financial Corp.

"Luckily, we have a specialty," he said.

While other newspaper industry executives are blaming sluggish advertising growth and competition from the Internet for a weak operating environment, Salzman doesn't labor over the problems affecting the industry.

Because Munger and a handful of outsiders control 70 percent of the Daily Journal's outstanding shares, the company operates much like a family-owned firm in that it doesn't have to answer to jittery institutional investors.

"Niche publications are somewhat immune to what's happening in the newspaper industry because they appeal to a specific audience and they can be quite profitable," said John Morton, a newspaper analyst at Morton Research Inc. in Silver Spring, Md.

"The newspapers that are having trouble now are those that are general interest publications. Business journals and legal publications provide detailed information that you don't really get anywhere else."

Morton has been a vocal critic of Wall Street's appetite for ever-higher profit margins. He claims newspapers are erroneously being forced to cut costs and staff rather than create products that could bring in incremental revenues. He also believes newspapers' circulation problems began long before the Internet emerged as a competitor.

"Advertising is soft and newsprint is expensive, but dally newspapers are still highly profitable," Morton said.

Last year, the average profit margin of publicly traded companies with newspaper operations was 19.2 percent, down from 20.5 percent in 2004. This year, profit margins may decline slightly to 18 percent, which is still nearly twice the operating profit of Fortune 500 companies, Morton said.

Costly venture

Though it appears that the newspaper industry is under siege, newspapers benefited from the infusion of cash into dot.com companies in the late 1990s. Many newspapers had their strongest operating profits in 2001, just before the Silicon Valley's digital economy went bust.

Morton thinks Wall Street is unrealistic in demanding the same high level of profit margins that it had before the dot.com bubble burst.

The Daily Journal has suffered from a foray into the case-management software industry, which helps courts maintain court calendars, assign judges and track payments in child support and traffic cases.

After buying a 93 percent stake in the company that developed the software called Sustain, beginning in 1999, Daily Journal ended up in a protracted legal dispute with an outside service provider that it had fired in 2001.

In a recent filing with the Securities and Exchange Commission, the company said its expenditures for the development of new Sustain software products are "highly significant and will materially impact overall results at least through fiscal 2006."

The company said that if the programs are not successful, "they will significantly and adversely impact the company's ability to maximize its existing investment in the Sustain software."

"Everything's a struggle in the publishing business but to a certain degree we've been impacted by the case management software field," Salzman said.

Salzman attributes operating loss carry-forwards from Sustain for helping artificially bolster the Daily Journal's after-tax profits, which have averaged 36 percent over the past three years, making it one of the most profitable public companies in Los Angeles.

KATE BERRY Staff Reporter