NYT Reports Higher Profits On Digital Subscriptions Despite Lower Revenues

The New York Times Company (NYSE:NYT) posted its results for Q2, where it reported a 1% y-o-y decline in revenue to $489 million. Operating profit improved to $53.4 million as newsprint cost declined. Excluding depreciation, amortization and severance, operating profit rose 13% to $77.8 million from $68 million in the second quarter of 2012. Additionally, NYT reported growth in earnings per share (EPS) from continuous operations excluding severance and special items, to 14 cents a share.

While advertising revenues continued to decline (down 6% y-o-y), the firm saw growth in the circulation business. Circulation revenues grew 5% y-o-y driven by strong growth in digital subscribers and an increase in subscription fee. ^[1] As we’ve stated previously, we expect that New York Times will continue to focus on its digital subscription and online advertising products as they will help compensate for declining revenues from print advertising. Its growth strategy also focuses on increasing the digital subscriber base and launching new products.

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New Product Launch To Impact Operating Profits

During the first quarter, NYT unveiled its growth strategy that focuses on product development and subscriber acquisition along with significant new capabilities in product management, customer management and distribution. Additionally, NYT is aggressively rolling out video content to bolster online ads revenues. The company stated that these new initiatives will negatively impact its operating profit by about $20 -$25 million in 2013. Although NYT reported 2% y-o-y growth in operating margins in Q2, primarily due to lower newsprint cost, we expect margins to remain flat for the remaining half of 2013 due to the launch of these new products and services.

Digital Subscriber Growth Slows Down

According to our estimates, NYT’s print circulation and digital subscription division contributes nearly 45% to its stock value. While NYT’s daily print circulation continues to decline, its digital subscriber base grew albeit at a slower pace. In Q2, NYT’s paid digital subscriber base grew by 40% y-o-y to over 738,000. However, we are not concerned with the slower growth rate of digital subscribers as the company has announced a host of new initiatives such as the launch of a lower-priced paid product that will boost growth in the digital subscriber base. Additionally, NYT is also planning to offer more entertainment services through mobile application and expand internationally to rope in new subscribers.

We currently estimate NYT’s number of online subscribers to increase to around 1.4 million by the end of our forecast period. However, if the number increases to 2 million, we would see 10% upside to our price estimate. Conversely, if the number slows to around 1 million, the estimated value would decrease by 10%.

Print Advertisements Business Expected To Decline

The print ads division is the second largest division of NYT and makes up for nearly 30% of its value by our estimates. With the proliferation of smartphones and Internet access, the print ads business has been declining as most advertisers have shifted spending to online ads.

The print ads division of NYT has not been able to buck the trend and continues to report a decline in revenue. This trend continued the quarter as NYT reported a 7% y-o-y decline in print ads revenues to $152.8 million. We currently project that NYT’s print ads revenues will continue to decline, in line with the U.S. national print ad spending.

Online Ads Continue To Decline

Online advertising is the third largest division of NYT and makes up near 25% of its estimated value. In this earnings announcement, NYT stated that digital advertising suffered from pricing pressure due to programmatic buying and a glut of available ad inventory. As a result, online ads revenues declined by 2.7% y-o-y to $51.2 million. However, the online ads revenue share to NYT’s total revenue improved to 24.7% in Q2 2013 from 23.9% in Q2 2012.

NYT is experimenting with new ad formats to monetize its desktop and mobile content. Additionally, NYT rolled out video content for its properties to increase user engagement which will help bolster online ads revenue going ahead. We estimate that these initiatives will boost the number of unique visitors to NYT’s website and expect the unique visitor count to grow to 60 million by the end of our forecast period.

We are currently updating our NYT model. At present, we have a $8.2 price estimate for New York Times, which is approximately 30% below the current market price.

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1. 8-K, SEC [↩]