NYT Earnings: Profitability To Improve Post NEMG Sale

The New York Times Company (NYSE:NYT) posted its Q3 results and reported a 2% y-o-y rise in revenue to $362 million. Operating profit also improved to $12.5 million as newsprint costs declined. Excluding depreciation, amortization, severance and special items, operating profits rose 35% to $39.9 million from $29.6 million during the quarter. However, the company reported a loss in earnings per share (EPS) of 3 cents from continued operations as it had to pay pay taxes on the proceeds from the sale of New England Media Group (NEMG).

During the quarter, advertising revenues continued to decline (down 2% y-o-y) while the circulation revenues grew 5% y-o-y due to strong growth in digital subscribers and an increase in the print subscription fee. ^[1] As we’ve stated previously, we expect that New York Times will continue to focus on growth in digital subscriptions and online advertising products as these can help in offsetting the decline in revenues from print advertising.

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NEMG Sale To Boost Profitability

In our pre-earnings note, we argued that the sale of NEMG will augur well for NYT’s revenues and profits. Q3 results clearly indicate that NEMG was eroding NYT’s profitability since it posted wafer thin margins in the first nine months of FY13. Additionally, this division posted an operational loss in 2012. NEMG consistently lost market share and reported a decline in revenues. With the sale of NEMG, we expect the company to report an improvement in profit margins and revenues in the future. The company can now use the cash from sale of these assets to pursue its growth strategy and focus on propagating its core brand.

Digital Subscription Buoys Circulation Revenues

According to our estimates, NYT’s print circulation and digital subscription division contribute nearly 45% to its stock value. While NYT’s daily print circulation continues to decline, its digital subscriber base has continued to expand at a fast pace. In Q3, NYT’s paid digital subscriber base grew by 28% y-o-y to 727,000. The growth in the digital subscriber base was driven by a host of new initiatives such as the launch of a lower-priced product. Digital subscription now accounts for nearly 18% of NYT’s circulation revenues as opposed to 12% in 2012. Going ahead, we expect growth in digital subscription to drive growth in circulation revenues. We currently estimate NYT’s number of online subscribers to increase to around 1.4 million by the end of our forecast period.

Advertising Revenues Decline, Albeit At A Slower Pace

With the advent of the Internet, the print ads business has been on a decline as now advertisers are increasingly earmarking more funds for online ads. The print ads division of NYT, which makes up 28% of its estimated value, has not been able to buck the trend and continues to report declines in revenue. However, the print ads revenues declined at a slower pace in Q3 due to positive growth in the national ads category. NYT reported a 1.5% y-o-y decline in print ad revenues to $105 million. We currently project that NYT’s print ads revenues will continue to decline, in line with the U.S. national print ad spending.

Additionally, the online advertising division, which is the third largest division of NYT and makes up 25% of its estimated value, posted a 3.5% y-o-y decline in revenues to $33 million in Q3. The digital advertising continued to suffer from pricing pressure due to programmatic buying and a glut of available ad inventory. However, NYT continues to add content especially video content to its websites to increase user engagement and bolster online ads revenues. Additionally, the company continues to experiment with custom advertising and has increased its product offering on mobile devices. 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 $8.33 price estimate for New York Times, which is approximately 40% below the current market price.

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1. 8-K, SEC [↩]