The New York Times Company (NYT - Analyst Report) recently posted better-than-expected second-quarter 2012 results. The quarterly earnings of 14 cents a share beat the Zacks Consensus Estimate by a penny, and rose 27.3% from 11 cents earned in the prior-year quarter.
On a reported basis, including one-time items, the company posted a quarterly loss of 60 cents compared with a loss of 79 cents 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. But, these failed to offset waning print and digital advertising revenues.
The New York Times Company’s top-line portrayed a marginal growth. After declining slightly by 0.3% in the first quarter of 2012, total revenue rose 0.6% to $515.2 million, and also came ahead of the Zacks Consensus Estimate of $509 million. The increase in the top line was led by strong circulation revenue.
However, 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 6.8% to $244.3 million in the second quarter, as against a fall of 8.1% registered in the first quarter of 2012.
Notably, the rate of decline decelerated on account of improving trends across digital advertising, which in turn was primarily attributable to encouraging advertising scenario at the About Group.
The diversified media conglomerate hinted at improving advertising revenue trends in the third quarter of 2012 compared with the second quarter on the back of enhanced digital advertising performance.
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 0.3% to $437.1 million during the quarter. Management said that operating costs is expected to rise in the low to mid-single digits in the third quarter of 2012.
Total adjusted operating profit rose 6.5% to $78.1 million, whereas operating margin expanded 90 basis points to 15.2%.
By segment, News Media Group revenue grew 1.2% to $489.8 million during the second quarter. Advertising revenue dropped 6.6% to $220.2 million. Digital advertising fell 1.6% to $52.6 million, reflecting declines witnessed across national display and classified advertising revenues. Print advertising dipped 8%, following a decline of 7.2% witnessed in the first quarter of 2012.
Circulation revenue climbed 8.3% to $233.3 million. Management now expects total circulation revenue to rise in the mid to high-single digits in the third quarter, gaining from digital subscription initiatives and increase in print circulation price at The New York Times. Adjusted operating profit for the segment jumped 12.9% to $77 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 17.1%, followed by automotive that fell 12.5%, and help-wanted that dropped 3.7%. National and retail advertising dipped 6.1% and 2.8%, respectively.
About Group segment’s revenue dropped 8.7% to $25.4 million due to fall witnessed in both cost-per-click and display advertising. However, this showed improvement over the first quarter, when the revenue had declined 23.1%. Adjusted operating profit plunged 30.4% to $10.2 million, reflecting a decline in advertising revenue.
Digital advertising revenue for New York Times’ Digital business, which includes NYTimes.com, About.com, Boston.com, BostonGlobe.com, fell 4% to $76.7 million during the second quarter, following a decline of 10.3% in the previous quarter, and now accounts for 31.4% of total advertising revenue, up from 30.5% in the prior-year quarter.
Other Financial Aspects
The company ended the quarter with cash and short-term investments of $570.1 million and total debt and capital lease obligations of approximately $775.8 million. The company has no outstanding borrowings under its revolving credit facility of $125 million as of June 24, 2012.
The New York Times Company incurred capital expenditures of approximately $10 million during the quarter. Management now anticipates capital expenditures to be $50 million in fiscal 2012.
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. 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.
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 509,000 at the end of the quarter, reflecting a jump of about 12% since March 18, 2012.
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 23,000 at the end of the quarter, representing an increase of 28% since March 18, 2012.
The increase the subscriber base was due to the company’s decision to limit the number of free articles that can be read by online traffic visiting the website of its flagship newspaper. Online visitors cannot access more than 10 free articles per month, which is exactly half of what the pay-and-read model offered when the system was launched.
Another media conglomerate, News Corporation (NWSA - Analyst Report) 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 streamline its cost structure, strengthen its balance sheet, and rebalance its portfolio. As a part of its ongoing strategy to completely offload assets that bear no direct relation with the core operations, the company divested its remaining stake (210 Class B units) in the Fenway Sports Group in May 2012.
The company also completed the sale of Regional Media Group to re-focus on its core newspapers and pay more attention to its online activities. Consequently, we have a long-term Outperform recommendation on the stock.
However, we remain apprehensive about risks that the company faces due to its high dependence on advertising revenue. This is well defined through a Zacks #3 Rank that translates into short-term Hold rating.