Risk, Reward Balance NY Times

The economy, which still appears to be in a state of hibernation, has been taking its toll on publishing companies, and The New York Times Company ( NYT - Analyst Report ) is no exception. However, the companies are contemplating on finding new revenue generating avenues.

Advertising - an Inherent Risk

Advertising, which remains a significant source of revenue for the company, in turn depends upon the global financial health.

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 8.1% in the first quarter of 2012, as against a fall of 7.1% registered in the fourth quarter of 2011.

Print advertising decreased 7.2%, whereas digital advertising revenue dropped 10.3% during the first quarter of 2012. Advertising revenue at the News Media Group fell 6.1%.

Tough macroeconomic conditions along with softness in advertising demand impacted the results. Advertisers are shying away from making any upfront commitments in an economy that is showing an uneven recovery. Management hinted that the advertising revenue trends in the second quarter of 2012 will be similar to what was witnessed in the first quarter for the News Media Group.

Another diversified media conglomerate, Gannett Company Inc. ( GCI - Analyst Report ) , the publisher of the nation's one of the largest-selling daily newspaper, USA Today, hinted of a tepid recovery in the economy along with weakness in advertising demand in the U.S. and U.K. We observe that publishing advertising revenue fell 8.4% during the first quarter of 2012, following a decline of 7.1% in the fourth quarter of 2011.

Diversifying Business Model

The New York Times Company has been adding diverse revenue streams, which include a circulation pricing model and a pay-and-read model for NYTimes.com, the International Herald Tribune and BostonGlobe.com, to make it less susceptible to the economic conditions. The company is also adapting to the changing face of the multiplatform media universe, which currently includes mobile, social media networks and reader application products in its portfolio.

Despite hiccups in the economy, what still guarantees revenue generation 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 seek new revenue avenues, the publishing companies contemplated charging readers for online content.

Other Initiatives

In an effort to offset the declining revenue and shrinking market share, publishers are scrambling to slash costs. The New York Times Company has been realigning its cost structure and streamlining its operations to increase efficiencies, and in turn the operating performance.

The company is also offloading assets that bear no direct relation with the core operations. The New York Times Company recently divested its remaining stake (210 Class B units) in the Fenway Sports Group, the owner of the Boston Red Sox and the Liverpool Football Club, for $63 million.

Another example of asset shedding by the company is the sale of Regional Media Group, which has long been grappling with shrinking advertising revenue.

Waning print advertising revenue, in an uncertain economy, 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 divest is also considered part of the cost containment efforts undertaken to stay afloat in this turbulent environment.

Holds Zacks #2 Rank

The New York Times Company remains committed to streamline its cost structure, strengthen its balance sheet and rebalance its portfolio. However, we remain apprehensive about risks that the company faces due to its high dependence on advertising revenues. Currently, we have a long-term ‘Neutral’ recommendation on The New York Times Company. However, the company holds a Zacks #2 Rank that translates into short-term ‘Buy’ rating, and well defines the company’s effort to navigate through challenging times.