New York Times Ad Sales Fall But Digital Subscribers Offer Hope

The New York Times Company (NYSE:NYT) posted a net loss for the third quarter, which caused the stock to drop over 20% during Thursday’s trading session. The firm reported a slight 0.6% decline in overall revenues compared to 2011 driven by an 8.9% decrease in advertising revenues, partially offset by a 7.4% increase in circulation revenues. The company also reported a year-over-year decline in operating profit to $8.5 million 2012, compared with $42 million in 2011. ^[1]

Overall, the decline in revenue was more or less expected since it was driven by a 10.9% decline in print advertising, an industry in secular decline. However, what was encouraging was that the company posted healthy growth in their digital subscriber base, which increased to 592 thousand subscribers, an increase of 11% from the second quarter.

Going forward, we expect the New York Times to continue to focus on its digital subscription and online advertising products, revenue growth from which will help compensate for the declining revenue from print advertising.

Click here to see our full analysis of New York Times

Digital Subscriber Growth Encouraging

The secular decline in the print newspaper industry combined with the ever increasing amount of content consumption occurring online, made it essential that New York Times posted an increase in its digital subscribers. The company did not disappoint on this front as it grew its digital subscriber base by a healthy 11% quarter-over-quarter. We think that one of the primary drivers of this increase was the recent change in the firm’s paywall, which decreased the number of articles a non-paying user could read to 10 per week from 20.

The most encouraging fact about the continued increase in NYT’s digital subscribers is that it highlights the value of the content that the company provides; users could have switched to other free news sources for their content but instead chose to stay with New York Times and pay for a subscription. This shows us that if New York Times is able to maintain the quality of their content, it could maintain its digital subscriber growth rate over the next few years.

We currently estimate that the number of NYT Online Subscribers will increase to approximately 1.3 million by the end of our forecast period, but if the total number of subscribers increases to approximately 1.6 million, we would see 5% upside to the Trefis price. Conversely, if the number of digital subscribers slows to approximately 1 million, we estimate that New York Times’ value would decrease by 5%.

You can assess the impact that digital subscriber growth has on New York Times’ value by using our tool below:

Decrease in Online Ad Revenues Troubling

We were also keeping a close eye on the company’s advertising revenues, which declined 9% due to an 11% decline in print advertising and a 2% decline in digital advertising revenues. We had expected print advertising revenues to decline until the end of our forecast period, primarily because of a secular downward trend in US national print ad spending, but did not expect a decline in online ad spending.

According to the company’s management, the slowdown in digital advertising was due to a tougher economic environment in which business confidence weakened. Since a weak economic environment is expected to persist over the next few quarters, we could see a continued slump in digital ad revenues. We think that online advertising plays a key role in New York Times’ overall strategy because revenues from this segment can offset declines in print advertising and circulations.

Conclusion

With national print ad spending and newspaper circulation on the decline, New York Times’ brand value along with its digital subscriber growth is central to the business’ health going forward. The company’s strategy of decreasing the number of free page views to increase subscriber growth paid off during the quarter, and it must continue to maintain this growth rate justify our current valuation.

We currently have a $7.54 price estimate for New York Times, which is approximately  10% below the current market price.

Click Here to Understand What Drives a Stock at Trefis

1. 8-K, SEC [↩]