NYT: Steeper Fall in Ad Revenues

Highlights include The New York Times Co. (NYT - Snapshot Report), The McClatchy Company (MNI - Snapshot Report), The E. W. Scripps Company (SSP - Analyst Report), Journal Communications Inc. (JRN - Snapshot Report) and Meredith Corp. (MDP - Analyst Report).

New York Times: Fall in Ad Revenue Accelerates

Shares of The New York Times Co. (NYT - Snapshot Report) plunged nearly 16% following the publisher’s release of 1Q09 financial results that showed advertising revenue plummet 27% to $335 from the prior-year quarter.

Classified advertising was hardest hit, falling 45% to $58 million. Internet ad revenue, which had only begun slipping last quarter – following a 15% increase in the first nine months of 2008 -- declined 6% in 1Q09 to $68 million. In total, Internet businesses accounted for 12.8% of the company’s revenue in 1Q09. Circulation, however, increased 1%, boosted by price increases.

EPS from continuing operations, excluding one-time items, fell to negative $0.34 in 1Q09, from EPS of $0.08 in 1Q08 – widely missing the consensus estimate of negative $0.04.

Operating costs fell 9.5% year-over-year, a far-slower rate than the revenue decline. Costs reductions are set to increase, however. Like its competitors, The New York Times Co. has been scrambling to cut costs fast enough to meet sinking revenue and to preserve cash flow for debt service.

In the last several months, the company has trimmed staff, cut salaries by 5%, suspended its dividend, completed a $225 million sale-leaseback of its headquarters building, refinanced notes due early next year with a $250 million private placement in high-cost debt and warrants to equity stakeholder, Carlos Slim, and put its 18% stake in the Boston Red Sox up for sale.

Most of the company’s non-revolving debt is now due in 2015 or later, providing it breathing room to weather the recession.

Most dramatically, The New York Times Co. threatened in early April to close the 137-year old Pulitzer prize-winning Boston Globe within a month unless it gets $20 million in union concessions. The threatened closure follows a similar action Hearst Corp. took in February to successfully obtain cuts in staff at the San Francisco Chronicle.

For 2Q09, management indicated that it expects a similar rate of ad revenue decline. Relief depends on the economy stabilizing, which economists widely agree is not likely to happen this year.

A portion of ad revenue industry-wide will not likely be recouped with the current business models, even after the economy recovers. To be sure, a portion of classified has moved to wider-spread, more targeted, lower-priced or free options, such as eBay or Craigslist, and will not likely return.

Longer-term, The New York Times Co. management indicated that it is looking to build new online revenue streams to leverage its strong brand and successful website.

As we discuss in our overview dated February 27, “Publishing – Industry in Crises,
Business model lags changing times,” the secular downturn will force a viable new business model for online news, one that relies on subscription or one-time user fees in addition to advertising revenue.

Until there is some visibility to stabilization, we would not recommend buying shares of publishing companies (remain underweight), including both newspaper publishers such as The McClatchy Company (MNI - Snapshot Report), The E. W. Scripps Company (SSP - Analyst Report), Journal Communications Inc. (JRN - Snapshot Report) and magazine publishers such as Meredith Corp. (MDP - Analyst Report).