The New York Times Company (NYT) recently posted better-than-expected first-quarter 2012 results. The quarterly earnings of 8 cents a share breezed past the Zacks Consensus Estimate of 2 cents, and was substantially higher than break-even results posted in the prior-year quarter. Both the comparable quarters exclude the results of Regional Media Group as it was discontinued.
On a reported basis, including one-time items, quarterly earnings came in at 28 cents compared with 4 cents a share delivered in the year-ago quarter.
Let’s Dig Deep
The quarter reflects favorable response to the digital subscription packages, increase in circulation revenue and fall in attrition rate as subscribers to the New York Times’ print version are able to access content or articles online as well as on all applications of The Times for no additional charge. However, these failed to offset waning print and digital advertising revenues.
The New York Times Company’s top-line continues to fall. After declining 2.8% in the fourth quarter of 2011, total revenue slipped marginally by 0.3% to $499.4 million in the first quarter of 2012, and came almost in line with the Zacks Consensus Estimate of $499 million.
The ongoing slouch in the advertising market continues to weigh upon The New York Times Company, the publisher of The New York Times, the International Herald Tribune, The Boston Globe and 15 other daily newspapers. Total advertising revenue slid by 8.1% to $237.9 million in the first quarter, as against a fall of 7.1% registered in the fourth quarter of 2011.
The New York Times Company also notified that it has been effectively managing its operating costs. Operating costs, excluding special items, depicted a decline of 1.4% to $442.2 million during the quarter. Management said that operating costs is expected to rise in the low-single digits in the second quarter of 2012.
Total adjusted operating profit rose 9.4% to $57.2 million, whereas operating margin expanded 110 basis points to 11.5%.
Segment Discussion
By segment, News Media Group revenue grew 1.3% to $475.4 million. Advertising revenue dropped 6.1% to $215.2 million. Digital advertising fell 2.3% to $48.5 million, reflecting declines witnessed across national display and classified advertising revenues. Print advertising dipped 7.2% but portrayed an improvement over a decline of 7.8% witnessed in the fourth quarter of 2011.
Circulation revenue climbed 9.7% to $227 million. Management now expects total circulation revenue to rise in the high-single digits in the second quarter of 2012, gaining from digital subscription initiatives and increase in print circulation price at The New York Times. Adjusted operating profit for the segment jumped 13.3% to $56 million due to increase in circulation revenue.
The company in the News Media Group experienced fall in all major advertising categories, with significant decline witnessed in real estate classified advertising, which dropped 16.9%, followed by automotive that fell 7.4%, and help-wanted that dropped 5.5%. National and retail advertising dipped 6% and 0.8%, respectively.
The diversified media conglomerate professed of a challenging economic environment, which we believe will continue to dampen advertising revenue. Management hinted that the advertising revenue trends in the second quarter of 2012 will be similar to what witnessed in the first quarter for the News Media Group.
About Group segment’s revenue plummeted 23.1% to $23.9 million due to fall witnessed in both cost-per-click and display advertising. Adjusted operating profit plunged 45.8% to $9.2 million, reflecting a decline in advertising revenue. Management expects advertising revenue trends to portray a moderate improvement in the second quarter of 2012 compared with the first quarter.
Digital advertising revenue for New York Times’ Digital business, which includes NYTimes.com, About.com, Boston.com, BostonGlobe.com, dropped 10.3% to $71.1 million, and now accounts for 29.9% of total advertising revenue, down from 30.6% in the prior-year quarter.
Other Financial Aspects
The company ended the quarter with cash and short-term investments of $431.3 million and total debt and capital lease obligations of approximately $774.3 million. The company has no outstanding borrowings under its revolving credit facility of $125 million as of March 25, 2012.
The New York Times Company incurred capital expenditures of approximately $7 million during the quarter. Management now anticipates capital expenditures between $50 million and $60 million in fiscal 2012.
Divestiture Activities
The New York Times Company completed the sale of Regional Media Group on January 6, 2012 – consisting of 16 regional newspapers, print publications and associated ventures – to Halifax Media Holdings LLC, the proprietor of The Daytona-Beach News Journal in Florida, for approximately $140 million in cash.
The deal has resulted in after-tax proceeds of approximately $150 million. The company hinted that the after-tax gain on the sale is being utilized for general business purposes.
Waning print advertising revenue, in an economy in turmoil, compelled The New York Times Company to take this tough decision of divesting Regional Media Group, part of The New York Times Media Group. This would allow the company to re-focus on its core newspapers and pay more attention to its online activities. The decision to offload the division is also considered part of the cost containment efforts undertaken to stay afloat in this turbulent environment.
The New York Times Company also shed 100 of its remaining units in Fenway Sports Group, the owner of the Boston Red Sox.
Let’s Conclude
The company’s advertising volume came under pressure as advertisers shied away from making any upfront commitments, in an economy which is showing an uneven recovery.
Despite hiccups in the economy, what still promises a guaranteed revenue generation avenue is The New York Times Company’s pricing system for NYTimes.com, which was launched on March 28, 2011. The company notified that the number of paid digital subscribers for The Times and the International Herald Tribune reached 454,000 as of March 18, 2012, reflecting an increase of about 16% compared with the fourth quarter of 2011.
The company also launched a pay and read model for BostonGlobe.com for a weekly subscription of $3.99. The number of paid digital subscribers reached 18,000 as of March 18, 2012, representing an increase of 13% from the fourth quarter of 2011.
The publishing industry has long been grappling with sinking advertising revenue. This comes in the wake of a longer-term secular decline as more readers choose free online news, thereby making the print-advertising model increasingly irrelevant. To curb shrinking advertising revenue and seeking new revenue avenues, the publishing companies contemplated charging readers for online content.
Another media conglomerate, News Corporation (NWSA) has also moved towards an online subscription-based model for general news content. News International, a subsidiary of News Corporation, began charging readers for online content for The Times of London and Sunday Times of London effective June 2010.
The New York Times Company remains committed to streamlining its cost structure, strengthening its balance sheet and rebalancing its portfolio. However, falling print and digital advertising revenues remain a drag on the company’s performance.
Currently, we have a long-term Neutral recommendation on The New York Times Company. However, the company holds a Zacks #4 Rank that translates into a short-term Sell rating.
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