October 19, 2010
Paula Schwartz - Director, Investor Relations: Thank you and good morning, everyone. Welcome to our third-quarter 2010 earnings conference call. We have several members of our senior management team here to discuss our results with you, including:
- Janet Robinson, president and CEO;
- Jim Follo, senior vice president and chief financial officer;
- Scott Heekin-Canedy, president and general manager of The Times, and
- Martin Nisenholtz, senior vice president, digital operations;
All comparisons on this conference call will be for the third quarter of 2010 to the third quarter of 2009, unless otherwise stated. Our discussion will include forward-looking statements, and our actual results may differ from those predicted. Some of the factors that may cause them to differ are included in our 2009 10-K. Our presentation will also include non-GAAP financial measures, and we have provided reconciliations to the most comparable GAAP measures in our earnings press release, which is available on our corporate Web site at www.nytco.com.
Now I will turn the call over to Janet Robinson.
Janet Robinson: Thank you, Paula, and good morning, everyone.
Our third-quarter results demonstrate our ability to manage our business amidst both uneven economic conditions and a period of intense transition for our industry. Our print advertising trends and the steadfast growth in our digital advertising numbers are further proof of our determination and resilience amid these circumstances. And while we have already been successful in greatly reducing our overall costs, we did continue to find ways to manage our expenses in the quarter while maintaining our quality journalism and further investing in our digital strategy. In ending the quarter slightly down in overall advertising revenue versus the third quarter of 2009, we have further confirmation that the path toward economic recovery will not always be a direct one. But let us not lose sight of the larger picture: We have made substantial progress so far this year, and we remain confident in our long-term strategy.
Some of the Company’s actions that informed that confidence were:
- Rigorously controlling our expenses, with the 2009 cost re-engineering presenting formidable comparison numbers;
- Expanding our digital offerings, such as with the launch last week of our new NYTimes app for the iPad and the impending introduction of the NYTimes.com pay model;
- Continuing to keep our brand promise of high-quality journalism as our very top priority; and
- Investing in our asset portfolio to support our core operations.
In the third quarter, although we experienced marketplace volatility, advertisers sustained their spending levels across our products. We were able to hold the Company’s operating expenses to roughly flat in the third quarter, overcoming the fact that 2009 saw the steepest expense cuts in our history and therefore presented very tough comparable numbers. We maintained our relentless focus on managing costs to mitigate the effects of our revenue declines on operating performance in the quarter, despite higher newsprint prices. As we previously stated, these cost-control efforts have in fact become more challenging in the second half of the year.
Our operating profit in the third quarter, excluding depreciation, amortization, severance and special items, was down 24 percent to $62 million from $81 million in the third quarter of 2009. However, year to date through September, our operating profit on the same basis was up 45 percent. On a GAAP basis, we reported operating profit from continuing operations of $9 million in the third quarter compared with the $24 million loss we sustained in the same period of 2009, and year to date through September our operating profit totaled $122 million versus an operating loss of $62 million for the same period in 2009.
Diluted earnings per share from continuing operations, excluding severance expense and special items, were 7 cents compared with 16 cents in the same period of 2009. On a GAAP basis, we reported a diluted loss per share of 3 cents from continuing operations compared with a loss of 24 cents in the third-quarter 2009 period. Our results involve a couple of special items, which Jim will review with you.
Our digital offerings were front and center in the third quarter and will get an even brighter spotlight over the next few months. In January, we announced that we will be introducing a pay model for NYTimes.com in 2011, and we plan to release details on price and gate placement closer to the launch. What I can share with you today is that the model will be designed so readers referred from third-party sites such as blogs, social networks and search engines will be able to access that content without triggering the gate. This first-click-free policy will preserve NYTimes.com’s significant reach and advertising inventory.
Separately, just a few days ago we launched our expanded-content NYTimes app for the iPad, which builds on the Editors’ Choice app and offers access to more than 25 sections of Times content, now with many more videos and photos, all continuously updated throughout the day. The new app is free initially but will become a subscription product along with our NYTimes.com pay site in 2011.
Within the New England Media Group, we’ve seen two significant developments recently with regard to our Web sites. In August, the Worcester Telegram & Gazette adopted a new metered model for its site, telegram.com, giving all registered users free access to 10 staff-produced articles per month but asking them to pay a monthly or daily rate for articles beyond that initial 10. Newspaper subscribers continue to receive unlimited access to telegram.com as part of their subscriptions.
Also, early in the fourth quarter, The Boston Globe announced its new digital strategy that will launch in the second half of 2011. The Globe will split its digital brand into two distinct Web sites, keeping Boston.com free while establishing a subscription pay site, BostonGlobe.com, that will feature content produced by the newspaper’s journalists. Boston.com, one of the nation’s largest regional Web sites, will continue to focus on being a one-stop source for all things Boston that offers breaking news, sports and weather, as well as classified advertising, social networking and culture information. BostonGlobe.com will contain all of the stories and other content from the day’s paper as well as exclusive reports, in-depth news, analysis, commentary, photos and graphics, video and interactive features. While we have not finalized our pricing for the subscription-based site, we do know that access to BostonGlobe.com will be included for free as part of a print subscription.
Another one of our strategic focuses is managing our asset portfolio. Early in the fourth quarter, we made a $4 million investment in Ongo – a consumer service that will allow users to read and share digital news from multiple publishers – with similar contributions coming from The Washington Post and Gannett. We expect that this service will launch before the end of the year, and we will share more details at that time.
Now, let me offer some more depth on our third-quarter revenues.
Total revenues for the Company declined 3 percent, with advertising revenues down 1 percent, circulation revenues down 5 percent and other revenues down 2 percent.
Substantial growth in digital advertising revenues, which rose 15 percent, partially offset a 6 percent decrease in print advertising revenues and kept our total advertising revenue to down 1 percent compared with the third quarter of 2009.
The positive impact of transitioning into a multiplatform company is undeniable in reviewing these numbers. Online advertising revenue continued to grow its share of revenue and made up 27 percent of our total ad revenues in the quarter, up from 24 percent in the third quarter of 2009.
At the News Media Group, which includes The New York Times, New England and Regional Media Groups, ad revenues decreased 2 percent due to lower print advertising. By advertising category, national revenues were up 5 percent, retail was down 9 percent and classified was down 10 percent. Within the classified area, recruitment was flat, real estate declined 9 percent and automotive was down 21 percent.
The print advertising decrease was 6 percent for the quarter, holding steady the progress from the second quarter and improving on the 12 percent decline in the first quarter. The decline for the quarter was largely offset by 22 percent growth in online advertising revenues. Our healthy online growth came in multiple categories: national display advertising, which increased a noteworthy 31 percent, as well as all three major classified categories – real estate, automotive and recruitment.
The Group’s total advertising revenues, which declined 2 percent year-over-year in the quarter, decreased 1 percent in July, were flat in August and declined 4 percent in September.
Now breaking down the News Media Group into its component properties, at the Times Media Group advertising revenues were up 2 percent in the quarter as slight decreases in print advertising were more than offset by impressive growth in online display and classified advertising.
The national print ad categories where we saw the largest gains were:
- Corporate, as a result of increased spending from energy companies;
- Technology, due to increased expenditures from campaigns focused on e-reader devices;
- Financial Services, led by higher spend from credit card companies, which promoted credit opportunities for small businesses; and
- Luxury Goods, such as the Fashion/Jewelry category, where stores are using print to build brand awareness and drive traffic.
The national print ad categories where we saw the largest declines were:
- Healthcare, due to difficult comparisons from hospitals and healthcare companies that did not run in this year's third quarter;
- Live Entertainment, led by declines in concert advertising related to the weak economy, along with limited support for Broadway show openings; and
- Media, due to tough comparisons from cable companies that did not repeat their business in the third quarter.
Firm growth in online national advertising was led by strength in American Fashion, Media and Financial Services.
It is important to remember that The Times is in a unique position in the national advertising market – both in print and online – with about three-quarters of its ad revenues coming from national advertisers. Our luxury advertisers have been increasing their spending, as evidenced by the revenue growth we've seen across our Web site in the past few quarters, including within our T Style franchise. We attribute this to our industry leadership position in the online luxury ad space, which we have the expertise and determination to grow through constant innovation.
As the number of platforms where readers demand our content proliferates, the Company remains aggressive in advertising product innovation, building premier positions across all modes of delivery. NYTimes.com continues to be an innovator in brand advertising, and marketers come to us for our reach, the quality of our audience and our ability to create and execute unique campaigns. As a result, we saw sizable gains in online display advertising during the quarter, with large-format ad units from blue-chip advertisers such as Tiffany, Polo Ralph Lauren and HBO.
Not all Times ad categories were as strong as national in the third quarter. Although classified advertising at the Times Media Group decreased in all three major categories – automotive, real estate and recruitment – real estate ended the quarter stronger than it started. Retail advertising revenues also ended in negative territory for the quarter.
At the New England Media Group, advertising revenues declined 9 percent in the quarter, due to weakness in print advertising. National ad revenues were down as online growth could not completely offset print declines, which were led by decreases in the Media and National Automotive categories. Retail advertising revenues were also lower despite healthy online gains, led by softness in print categories including Home Improvement and Health.
Classified advertising at the New England Media Group was soft in all categories except for recruitment, which saw impressive improvement as the quarter progressed.
At the Regional Media Group, advertising revenues decreased approximately 6 percent, primarily due to weakness in retail and classified print advertising. The rate of decline in classified real estate was fairly consistent, while recruitment and automotive advertising rebounded during the quarter.
At the News Media Group, circulation revenues were down 5 percent due to volume declines across the Group. Looking ahead, we will continue to evaluate our circulation pricing in coordination with our overall multiplatform strategy. And as you know, we will also be introducing a second digital revenue stream in 2011.
As a result of our commitment to constant innovation, we have developed a coveted technology expertise, and we identified a progressive new way to leverage that knowledge in the third quarter. In August, we announced Press Engine, a consultative endeavor to help other publishers take advantage of the Times's already substantial experience in building digital products, starting with apps for the iPhone and iPad. We have already begun marketing this technology and design solution and have many clients committed. We will launch Press Engine in the fourth quarter.
Separately, in August we added a new social media feature to NYTimes.com called Log In With Facebook, which enables users to link their NYTimes.com and Facebook accounts. Users can then share articles from NYTimes.com with their Facebook friends on our site and on Facebook, and NYTimes.com pages will highlight the most popular Times content within Facebook and the user's network of friends.
We are also in the midst of a significant expansion of our popular DealBook blog, increasing our staff in that area along with our ability to cover breaking financial news. Current and new advertisers to the section are already taking notice. In the third quarter we also built on The Times brand with the launch of Nate Silver's FiveThirtyEight blog in our politics section, giving NYTimes.com a unique perspective on statistics across issues relating to politics, culture and sports. All of these digital efforts have helped to ensure that NYTimes.com remains the most highly trafficked newspaper Web site in the United States and to keep the Company as a whole among the top 14 most popular parent company sites.
With all of this discussion of the Company's digital advancements, let me also assure you that our print product is alive and well. We will be printing newspapers for many years to come in order to delight a very large and loyal base of readers and advertisers, who are committed to the print reading experience and to the commercial benefits of advertising to a highly engaged print audience.
Building on that, expanding our reach and audience has ultimately driven our efforts to grow our audience in print, online, mobile, e-readers, social media and other products. In particular, during the past couple of years The Times has launched a number of mobile products. In the third quarter we averaged more than 100 million page views per month from our mobile sites and apps. We have also reached roughly 5 million downloads of our iPhone news app since its launch just over two years ago.
We continue to embrace innovative platforms and devices that provide rich experiences for our users, and advertisers are making good use of our large mobile audience. Our iPad news app has several advertisers this month, including Mercedes-Benz, and its placements are sold out for the remainder of the year. We had more than 650,000 total downloads of our Editors' Choice app, and it is becoming increasingly clear that top-quality advertisers are prepared to follow New York Times content to any and every platform. We are confident that our new iPad news app will generate the same kind of enthusiastic following – among both users and advertisers.
In the third quarter, the Company launched a variety of other iPhone and iPad products as well, with mobile development especially active at Boston.com. In August, we debuted the free Boston.com Real Estate app on the iPhone. And The Big Picture, Boston.com's popular blog, is now available as a paid app both on the iPad and the iPhone. The International Herald Tribune is also launching its news app for the iPad and iPhone in the fourth quarter, which will be free at launch but will eventually convert to a subscription product. This app is among the first designed by the Press Engine team. The IHT will also launch its Business Navigator paid iPhone app later this year, designed to help executives understand and negotiate business protocol around the world through select regional, business and travel headlines, and detailed country and travel information.
And speaking of digital endeavors, the About Group's total revenues rose 6 percent to $32 million in the third quarter. Advertising revenues rose 5 percent, bolstered by solid gains in display advertising, which were offset in part by lower cost-per-click advertising. Display advertising showed strong growth in categories including Consumer Packaged Goods, Media and Technology.
The About Group's operating costs increased 9 percent and operating costs excluding depreciation and amortization increased 10 percent to $16 million from $14 million, primarily because of higher compensation costs and marketing expenses. Operating profit rose modestly as higher advertising revenues were offset in part by increasing costs in the quarter. About's operating margin completed the quarter at a noteworthy 43 percent.
Total revenues from all of our Internet businesses increased approximately 13 percent to $89 million from $79 million in the third quarter of 2009. Internet businesses accounted for 16 percent of the Company's revenues in the third quarter versus 14 percent in the same period of 2009. Total Internet advertising revenues rose 15 percent to $78 million from $68 million in the same period of 2009.
Based on results in the first half of October, fourth-quarter revenue trends for print advertising are expected to improve modestly from the levels of the third quarter, while digital advertising is expected to be up approximately 10 percent. Similar to the third quarter, circulation revenues are expected to decrease 4 to 5 percent.
Now let me turn the call over to Jim, who will give you more details on our results.
Jim Follo: Thanks, Janet.
Our expense control remains impressive and solid. Operating costs were roughly flat in the quarter, despite higher compensation costs and newsprint prices, mostly offset by lower benefit costs and decreases in various other expenses.
Getting to the special items, our third-quarter earnings were unfavorably affected by 7 cents for a write-down of assets at The Boston Globe’s printing facility in Billerica, Massachusetts, and by 3 cents for an adjustment to estimated pension withdrawal obligations under several multi-employer plans related to amended labor agreements at The Boston Globe.
EPS in the third quarter of 2009 had been favorably affected by 2 cents for a gain on the sale of Regional Media Group real estate assets; and unfavorably affected by 33 cents, related to those same estimated Boston pension withdrawal obligations and a curtailment charge for a Company-sponsored plan, and by 8 cents for a tax expense from the reduction of the Company’s deferred tax balances as a result of lower income tax rates.
Severance costs were less than $1 million compared with $2.6 million in the third quarter of 2009.
Depreciation and amortization decreased to $30 million from $31 million. For the year we expect depreciation and amortization to be $120 to $125 million.
Newsprint expense increased by 20 percent, primarily due to prices that were 26 percent higher, offset in part by a 6 percent reduction in consumption. There were no additional East Coast newsprint price increases in the third quarter, but newsprint prices were still significantly higher than in the same period last year.
Newsprint prices increased steadily in the first half of the year. We believe the newsprint price variance will continue to be unfavorable on a year-over-year basis in the fourth quarter. We expect higher newsprint prices will negatively impact operating expense by approximately $13 million, excluding a favorable impact on operating expenses as a result of lower consumption.
Net interest expense decreased very slightly in the quarter to $21 million. For full-year, we expect net interest expense to be $85 to $90 million.
The Inbursa 14.053% notes due in 2015 may be called on or after January 15, 2012, at an initial redemption price of 105% of the principal amount, plus accrued interest. Given the terms, we currently intend to repay or refinance these notes at the earliest feasible date after January 15, 2012, depending upon available financing or other sources of cash at the time.
Our focus on the balance sheet continues to deliver results. We have continued to improve our liquidity position and generate strong cash flow, enabling us to finish the quarter with approximately $129 million in cash. We reduced our net debt and capital lease obligations by more than one-third to $646 million from its balance at the beginning of 2009, and we had no outstanding borrowings, excluding letters of credit, under our revolving credit facility in the quarter.
Our effective income tax rate was 32.8 percent in the third quarter. The effective tax rate for the first nine months of 2010 was 54.8 percent, primarily because of a $10.9 million onetime tax charge for the reduction in future tax benefits for retiree health benefits resulting from the federal health care legislation enacted in the first quarter of 2010. The tax benefit in the third quarter and first nine months of 2009 was unfavorably affected by $11.7 million in tax expense due to the reduction of the Company’s deferred tax asset balances as a result of lower income tax rates.
We have taken decisive steps to reduce capital spending – which further contributed to our improved liquidity. Capital expenditures totaled $9 million in the quarter and $19 million year-to-date. For the year we project capital spending will be $40 to $45 million.
We remain diligent in managing our operating expenses and expect fourth-quarter operating costs to decline, largely due to the severance expense level in the same period last year, and operating costs excluding depreciation, amortization and severance to be comparable, despite significantly higher newsprint prices and costs associated with the launch of the NYTimes.com pay model.
As we mentioned in our results this morning, we are well-positioned to thrive in the evolving media marketplace, thanks to the significant progress we have made and continue to make in reinventing our enterprise. Despite an increasingly competitive environment and volatile economic conditions, successful efforts across our organization continue to contribute meaningfully to our overall financial performance, demonstrating our trademark excellence and resilience.
And now we’d be happy to take your questions.