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The New York Times Company 2011 First-Quarter Earnings Conference Call

April 21, 2011

Janet L. Robinson: Thank you, Paula, and good morning, everyone. 

Our operating performance reflects the continuing transformation of our Company, which intersected with an important milestone in the first quarter.  While the challenges for our Company and for the larger economy are not yet behind us, the recent launch of subscription packages on NYTimes.com and across other digital platforms brings our plan for a new revenue stream to life.

While the advertising marketplace remains challenging, we are confident that the path we have been pursuing to transform our Company is the right one.  Our properties are well-positioned to continue to capitalize on the digitization of our content, and this provides us with another reason for optimism about the future of our Company.

In the first quarter, we continued our focus on core initiatives, including:

  • Maintaining an unwavering commitment to our brand promise of high-quality journalism across properties, highlighted recently by our four Pulitzer Prizes – two for The New York Times, one for The Boston Globe and one for our regional newspaper the Sarasota Herald-Tribune – the first time in more than a decade that all three of our news units have won Pulitzers in the same year;
  • Executing on the further monetization of our digital offerings, with the introduction of NYTimes.com’s subscription packages at the end of March, a historic development for our Company
  • Maintaining discipline on expense controls, even as we have taken out nearly 30 percent of our cost base over the past four years; and
  • Managing our asset portfolio to maintain its alignment with our core operations and strategic initiatives, leading to the opportunistic divestiture of some small portions of our investment portfolio in the first quarter.

The advertising marketplace faced increased pressure in the first quarter, reflecting the uncertain economic environment, recent global events and secular forces.  The volatility we saw in our business could also be witnessed in economic indicators such as the Consumer Confidence Index, which showed strength in February but then fell in March. 

As a result of these effects, the 4.5 percent increase in our digital advertising could not fully offset the 7.5 percent decline in print advertising in the quarter, leading to total advertising being down 4 percent.  Combined with a circulation decline of 4 percent, total revenues were down 4 percent for the quarter. 

With expenses remaining flat for the quarter, our operating profit before depreciation, amortization and severance decreased to $61 million in the first quarter from $83 million in the same period of 2010.  On a GAAP basis, operating profit was $31 million in the first quarter, compared with $53 million in the same period of 2010. 

Diluted earnings per share, excluding severance expense and special items, were 2 cents in the first quarter compared with 11 cents in the same period of 2010.  On a GAAP basis, we reported diluted EPS of 4 cents in the quarter, compared with 8 cents in the first-quarter 2010 period.

As you know, we introduced Times digital subscription packages in Canada in mid-March and globally at the beginning of the second quarter, and I am happy to report that the initial response is encouraging.  We are pleased with the number of subscribers we have acquired to date, as initial volume has meaningfully exceeded our expectations.  In addition, we have seen an increase in new home-delivery orders – from 7-day to weekend-only – since the launch, as print subscribers of all frequencies receive digital access at no additional cost. 

Approximately three weeks after the global launch, we have surpassed 100,000 paid digital subscribers, in addition to the loyal online readers receiving free access this year through a sponsorship from a luxury automobile manufacturer.  So soon after the launch, we do not yet have visibility into conversion and retention rates for these paying customers after the initial promotional period, although early indicators are encouraging.  Accordingly, we expect that we will be in a better position to disclose additional details as this initiative evolves.

While the current highly-charged news cycle makes comparisons difficult, declines in traffic at NYTimes.com are within our expectations.  In thinking about these declines, it is important to understand that a segment of inventory on any site goes unsold on the premium market, and is instead used for remnant programs or promotional house ads.  In our new online model, the revenue stream we are adding direct from consumers in the form of subscriptions is balanced against the loss of some inventory that would have been sold on the remnant market, but we fully expect to continue to meet all of the demands for premium inventory on the site.   

As for the ongoing operating costs associated with this initiative, we expect approximately $13 million in incremental expenses for the remainder of 2011, primarily due to promotional costs.

As you will recall, the heart of our metered model is that users can access 20 articles for free each month but are asked to become digital subscribers once they hit that mark.  The homepage and section fronts remain browsable for free, and DealBook content also remains accessible for free at this time, as we are building reader loyalty to this recently re-launched product.  We are intent on remaining part of the open Web, so we are welcoming visits from third parties such as search engines, social networks and blogs.  And, of course, all home-delivery subscribers receive free access to our all-inclusive digital package, providing them with Times content across the Web site, Times tablet apps such as the iPad, and Times smartphone apps such as the BlackBerry.

We also released a major update to The Times’s iPhone news application in conjunction with the digital subscription launch, adding video, slide shows and more blog content, improved navigation tools and more opportunities for sharing.  The Top News section of the app remains free to all users, but access to the remainder of the app’s content requires a digital subscription.  We have seen a total of 6.5 million downloads of our iPhone news app since its 2008 launch. 

Our NYTimes app for the iPad has also converted to a subscription product and is available in conjunction with the digital packages.  It still offers access to more than 25 sections of Times content, with the Top News section remaining free for non-subscribers, and has had more than 1.8 million downloads since its original launch a year ago.  The latest version of this app has received excellent reviews, and advertisers such as Salvatore Ferragamo and Ralph Lauren have leveraged our ability to create rich advertising experiences that build on the unique capabilities of the device.  As a result, we have commitments from a wide range of advertisers well into 2011.  We have worked closely with those clients to deliver innovative, engaging advertising that readers react to and remember.

The e-reader application business has proven to be another vibrant market where consumers are willing to pay for quality content, further diversifying our revenue streams and strengthening our digital businesses.  E-reader platforms that offer content from our publications include the Kindle, Nook and Sony Reader.  We continue to be the top-selling newspaper on the Kindle, and we have seen a 40 percent increase in total subscriber growth across the various devices since December.  The Kindle and Nook also recently announced that subscribers to The Times on those devices soon will receive free access to NYTimes.com.    

Another one of our strategic focuses is managing our asset portfolio, which in the first quarter lent itself to some small divestitures.  We sold a portion of our Indeed.com stake for a pre-tax gain of $5.9 million, but we still retain a substantial portion of our initial minority interest in the job listing aggregator, which is the number one job site worldwide with over 50 million unique visitors per month.  In February we also divested of our UCompareHealthCare business, which fell under the About Group umbrella and was sold for a nice return on our investment. 

Now, let me offer some more depth on our first-quarter revenues. 

Total revenues for the Company declined 4 percent, with advertising revenues down 4 percent, circulation revenues down 4 percent and other revenues up 3 percent. 

At the News Media Group, which includes The New York Times, New England and Regional Media Groups, continued strength in digital advertising, which was up 15 percent, could not offset the softness in print advertising.  The Group’s total advertising revenues, which declined 4 percent year-over-year in the quarter, declined 5 percent in January, were up 4 percent in February and declined 9 percent in March, a pattern that exemplifies the volatility in the marketplace that I referenced earlier.    

Digital advertising remained resilient, led by growth in national display.  We also saw gains in retail display, as well as in two of the major classified advertising categories – automotive and real estate.

By total advertising category, national revenue was down 2 percent, retail was down 9 percent, and classified was down 6 percent.  Within the classified area, recruitment was up 2 percent, automotive was flat and real estate declined 10 percent. 

Breaking down the News Media Group into its component properties, at The Times Media Group advertising revenues were down 2 percent in the quarter as growth in digital display was more than offset by print declines.  

Combined print and digital national advertising was down slightly.  National advertising categories experiencing the largest declines were:

  • Media, resulting from significant comparisons related to the re-transmission wars of 2010;
  • Hotels, where anticipated spending from major chains was pushed until later in the year; and
  • Studio Entertainment, driven by fewer new releases and adjustments to marketing spend based on box office results.  Digital experienced strong gains in Studios, however, including Web display and iPad sponsorships.

National ad categories where we saw the largest combined gains were:

  • International and American Fashion, as the luxury segment continues to post solid gains due to domestic and European designers and luxury watches;
  • Technology, where a combination of cross-platform branding and the continued influx of new tablets and smartphones presents great advertising opportunities; and
  • Financial Services, driven primarily by mutual fund companies and private wealth management firms.  In addition, the expanded DealBook franchise is proving to be an attractive environment for financial and other national advertisers.

Aggregate retail advertising declined despite strong digital growth.  The business and economic uncertainty in the marketplace associated with the Middle East unrest, rising oil prices and the crisis in Japan increased in the first quarter – particularly in March.  This dynamic had more of an impact on print, while digital continued to grow.

Aggregate classified advertising declined as gains in recruitment, led by a pick-up in the financial and technology job sectors, were offset by declines in the real estate and automotive categories.  Growth in real estate display, driven largely by the Manhattan real estate rental market, was offset by declines in agate listings.  Classified automotive advertising revenues continue to be affected by macroeconomic issues.

The Company remains aggressive in advertising product innovation, building premier positions across all modes of delivery.  About three-quarters of The Times’s Top 100 print advertisers also spend online.  NYTimes.com especially continues to be a leader 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.  The site has made bold moves on the advertising front, particularly on the homepage, where we have managed to balance a great user experience with a great advertiser experience.  Premium advertisers such as Gucci, Lincoln and Microsoft have made NYTimes.com their first destination for breaking digital advertising campaigns. 

Innovation also came in the print form during the quarter, as The New York Times Magazine launched a redesign under new editor Hugo Lindgren in March, featuring a revamped layout as well as a variety of new features, including a regular column from Times executive editor Bill Keller.  Readers and advertisers have both responded positively, and we have seen strong showings in the weeks since the redesign from categories such as Healthcare, Real Estate and Financial Services.  This strength in the main magazine combined with growth in our T Magazines led to a double-digit increase in advertising revenue across Times magazine products in the first quarter.

Last month we also launched our own initiative in the group-buying space with TimesLimited, which is an extension of what we have been doing for our long history as a company – connecting local businesses with readers.  Our deals are curated with our specific audience in mind and so far have included retailers such as the Italian marketplace Eataly and the famed restaurant 21 Club, both in Manhattan.  Our high-quality advertisers are welcoming the opportunity to work with The Times in providing these exclusive offers, which focus on premium products and experiences and are being provided for limited times and in limited quantities.  We believe The Times is uniquely positioned to thrive in this specific niche of an increasingly popular marketplace.

At the New England Media Group, advertising revenues declined 5 percent in the quarter, due to weakness in print advertising.  Digital ad revenues showed strong growth, reflecting increases in a variety of online categories – including national, retail and classified automotive.  Combined print and online national advertising was down, led by declines in the Telecom, National Auto and Packaged Goods categories, offset in part by increases in Travel, Financial Services and Museum advertising.  Total retail advertising revenues were also lower, led by softness in categories including Department Stores, Home Furnishings and General Merchandise, offset in part by an increase in the Electronics & Appliances category.  Aggregate classified advertising declined overall but saw solid growth in automotive, reflecting strength across both print and digital platforms.

In the second half of this year the Globe will split its digital brand into two, keeping Boston.com free while launching a subscription pay site, BostonGlobe.com.  The Boston Globe and Boston.com are very strong brands in the marketplace, and based upon extensive research, we believe those brands offer us an opportunity in the digital arena to meet the media needs of two distinct audiences.  The addition of BostonGlobe.com provides advertisers a new avenue to reach an affluent, educated audience in a distinctive online environment where we expect readers will take the time to read full articles.

BostonGlobe.com will include content published in the Globe along with breaking news throughout the day as well as original video, photo galleries and interactive features.  Boston.com will continue to be the best place to learn what is happening in the Boston area and will offer users a place to get a quick read of news, along with breaking news and sports coverage from the Globe.

At the Regional Media Group, advertising revenues decreased 10 percent, due to weakness in print advertising, particularly in the retail category.  On the digital side, the group saw growth in national and retail display, as well as in the automotive and recruitment classified categories. 

At the larger News Media Group, circulation revenues were down 4 percent due to print volume declines across the group.  According to our latest internal statistics, in the first quarter The Times’s net paid circulation averaged 905,000 on weekdays, down 4 percent from the first quarter of 2010, and 1.3 million on Sundays, down 3 percent.

Looking ahead, we will continue to evaluate our circulation pricing in coordination with our overall multiplatform strategy.  And as you know, the launch of digital subscriptions at NYTimes.com, and soon BostonGlobe.com, introduces a second digital revenue stream to the mix.  As I mentioned earlier in my remarks, we have also seen an uptick in print circulation orders at The Times early in the second quarter.    

In November we launched a significant expansion of our popular DealBook site at NYTimes.com, more than doubling our staff in that area along with our ability to cover breaking financial news for a high-level audience of C-suite executives and decision-makers.  Since the re-launch, DealBook’s online traffic has seen significant year-over-year gains on a monthly basis.  In March, for instance, it had another record-breaking month, nearly doubling its page views versus March 2010. 

In March we added another layer of personalization to NYTimes.com with the launch of the Recommendations feature, which points readers to articles based on what they have read in the past month and further deepens engagement on the site.  A dashboard available through article pages gives users a view of their recent reading history, including a tally of the articles they have read on the site by section – such as Business Day and World – and a glimpse of their most-read topics for that period, such as Nuclear Energy or the Federal Budget.  Based on the behavior captured in the dashboard, Recommendations also suggests current articles that may be of interest.

These digital efforts – along with many others – have helped to ensure that NYTimes.com remains the most highly trafficked newspaper site in the United States, with about 38 million unique visitors in March.  That number grows to nearly 62 million uniques when you look at the site’s global audience. 

Expanding our reach has ultimately driven our efforts to grow our audience in print, online, mobile, e-readers, tablets, social media and other products.  In particular, during the past couple of years The Times has launched a number of mobile products, such as our iPhone, Android, BlackBerry and Palm Pre apps.  In the first quarter we averaged more than 120 million page views per month from these mobile sites and apps.  

On the social media front, The Times continues to interact with Twitter and is the most popular newspaper there, with more than 3 million followers and with countless journalists and newsroom feeds sharing content and integrating The Times with online conversation.  And The New York Times also has a very strong following on Facebook, with more than 1.2 million fans there.

Moving on to the About Group, total revenues declined 10 percent to $31 million in the first quarter, and advertising revenues also declined 10 percent, mainly due to a decrease in cost-per-click advertising. 

We have begun to execute on planned investments toward a number of strategic initiatives at About, partially to respond to some of the secular changes taking place in the search universe.  To address them, About is currently expanding the volume and distribution of expert content on its platform, including launching its Spanish-language channel, which includes all original content and can be accessed at About.com/espanol; increasing its roster of more than 800 guide sites by about 25 percent in popular categories such as food, home, health, autos and parenting; doubling the number of how-to videos across its 24 channels, which will soon be available via YouTube; and redesigning its homepage. 

Design changes in cost-per-click advertisements served by Google had a negative effect on click-through rates in the quarter, and we expect that to be the case through the second quarter as well.  About also experienced a moderately negative impact on page views from the algorithm changes Google implemented in the quarter.

Display advertising saw first-quarter declines in categories such as Retail, Education and Home Improvement but showed growth in categories including Consumer Packaged Goods, Pharmaceuticals and Travel.  In addition to the effects of the uneven economy and competitive market pressures, About was cycling difficult comparisons with the first quarter of 2010, when total advertising grew 30 percent.

The About Group’s operating costs decreased 7 percent and operating costs excluding depreciation, amortization and severance also decreased 7 percent to $14 million, primarily due to the gain from the sale of UCompareHealthCare in February.  Operating profit declined 14 percent to $14 million in the quarter.  Nevertheless, About’s operating margin remained strong, at 46 percent, in the quarter.

Total revenues from all of our digital businesses increased 6 percent in the first quarter to $96 million from $90 million in the first quarter of 2010.  Digital businesses accounted for 17 percent of the Company’s revenues in the first quarter versus 15 percent in the same period of 2010.  Total digital advertising revenues rose 5 percent to $84 million from $80 million in the prior-year period.  Digital advertising revenue continued to grow its share of revenue and made up 28 percent of our total ad revenues in the quarter, up from 26 percent in the first quarter of 2010.

In March 2011 advertising revenues further softened, partly in response to the uneven economic climate.  In the first half of April, we saw total advertising trends improve relative to those in March, with declines at approximately the same level as in the first quarter.

Wrapping up, despite the continued challenges to our business brought by the continued uneven economy and secular changes, we believe the investments and initiatives we have outlined, particularly in our digital business, set the stage for our successful transition into a future where the underlying value of our content is more consistently recognized and rewarded across all our platforms. 

Now let me turn the call over to Jim, who will give you more details on our results.

Jim Follo: Thank you, Janet.

Our emphasis on expense control remains a strategic underpinning of the business, and we will continue to pursue opportunities to aggressively reduce costs.  As Janet mentioned, we have taken nearly 30 percent, or $850 million, out of our cost base over the past four years, all while maintaining the high quality of our award-winning journalism.  This quarter we were cycling against an 18 percent decline in operating costs in the first quarter of 2010. 

Operating costs were flat in the quarter, despite higher promotion and newsprint expense, which were offset by decreases in various other expenses.  While further expense control efforts have become more challenging, we remain focused on managing our expenses to identify further efficiencies in our operations and to respond to the secular changes in our industry.

Getting to the special items, our first-quarter earnings were favorably affected by 2 cents per share from the sale of a portion of the Company’s interest in the job listing aggregator Indeed.com. 

EPS in the first quarter of 2010 had been favorably affected by 4 cents for a gain from the sale of an asset at one of the paper mills in which the Company has an investment, and unfavorably affected by a 7 cent tax charge for the reduction in future tax benefits for retiree health benefits resulting from the federal health care reform legislation that was enacted in March 2010.

Severance costs increased by about $500,000 but were minimal in both the current and prior-year periods, at less than $1 million each quarter. 

Depreciation and amortization was $29 million in the quarter compared with $30 million in last year’s quarter.  In 2011 we expect depreciation and amortization to be $118 to $123 million.

Newsprint expense increased by 13 percent in the quarter, with a 16 percent increase from higher pricing offset in part by a 3 percent decrease from lower consumption.   Given current industry forecasts in 2011, newsprint prices are expected to increase during the second half of the year. Newsprint prices will be higher in the second quarter of 2011 as a result of prices rising steadily during the same period in 2010.

Net interest expense increased 20 percent in the quarter to $25 million, as a result of the $225 million debt offering we completed in November.  In 2011 we expect interest expense to be $100 to $105 million.  Then in January 2012, our 14% notes due 2015 will be prepayable, and it is our current intention to eliminate that debt from the balance sheet at the earliest feasible date.

The joint venture line saw a $6 million loss in the first quarter.  These joint venture results were negatively impacted by Fenway Sports Group’s acquisition last year of Liverpool Football Club, mainly due to the amortization expense associated with the purchase, which we expect will impact results from joint ventures for the remainder of the year. 

Income from joint ventures in the first quarter of 2010 was $9 million, including a $13 million gain from the sale of the asset I mentioned as part of last year’s special items.

Turning now to our pension obligations, the company made contributions of approximately $54 million in the first quarter to certain qualified pension plans.  The majority of these contributions were discretionary.  

We continue to manage our liquidity position and finished the quarter with $352 million in cash and short-term investments, even after making the pension contributions.  We had no outstanding borrowings, excluding letters of credit, under our revolving credit facility during the quarter. 

We continue to tightly manage capital spending, with capital expenditures totaling approximately $10 million in the quarter.  We project CapEx will total approximately $45 to $55 million for the year, which includes investments in digital systems across the Company.   

Our effective income tax rate was 21.2 percent in the quarter.  The rate was affected by an adjustment to reduce the Company’s reserve for uncertain tax positions.  In the first quarter of 2010, our effective income tax rate was 65.6 percent, driven by the tax charge I mentioned as part of the special items.  Excluding that charge, our effective income tax rate was 39.3 percent in that period.

We remain committed to aggressively managing operating expenses despite higher newsprint prices and pension expense, although we expect operating costs to increase modestly in the second quarter. 

We are well-positioned to maintain our leadership position in an increasingly digital media marketplace.  Despite the highly competitive environment and uneven economic recovery, successful efforts across our organization continue to introduce new revenue streams and positively impact our overall financial performance, demonstrating our trademark excellence and resilience. 

And now we’d be happy to take your questions.