NYT Earnings: Revenues Fail To Grow And Costs Drag On Profitability

The New York Times Company (NYSE:NYT), one of the leading newspapers in the U.S., posted its Q2 results on July 30. Even though the company continues to rollout new digital products (e.g., NYT Now, NYT Opinion and Times Premier) to bolster its content and digital ads  revenues, its print ads revenue continues to decline reflecting the secular downturn in print ads industry. During the quarter, NYT’s revenues declined by 0.6% year over year to $388.7 million from $391.0 million. Circulation revenues increased 1.4% and other revenues increased 7.7%, while advertising revenues declined 4.1%. Furthermore, its operating profit declined to $16.49 million on higher compensation and benefits expense, and marketing costs associated with the strategic growth initiatives, as well as higher retirement costs.

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Outlook for Q3 2014

The company expects circulation revenues to be flat in the third quarter of 2014 compared with the third quarter of 2013, as benefits from its digital subscription initiatives and the increase in print subscription prices bear fruit. Total advertising sales in the Q3 FY14 are expected to decrease at a mid-single digits rate compared with the Q3 FY13, primarily due to a challenging business environment in the print ads business. The company also expects Q3 2014 operating costs to increase at a low- to mid-single digits rate on a year-on-year basis as investments related to its strategic growth initiatives accelerate. Furthermore, the company expects to incur  a charge of $9 million in non-operating retirement expense in the third and fourth quarter. In addition, the Company expects the following on a pre-tax basis in 2014:

• Results from joint ventures: loss of $1 to $3 million,
• Depreciation and amortization: $75 to $80 million,
• Interest expense, net: $53 to $57 million, and
• Capital expenditures: $40 to $50 million. Revised upwards from $35 to $45 million.

Advertising Revenue Decline

With the advent of the Internet, the print ads business has been on a decline as advertisers are increasingly earmarking more funds for online ads. NYT’s print ads division, which makes up 28% of its estimated value, has not been able to buck the trend and continues to report declines in revenue. NYT reported a 7% year-over-year decline in print ad revenues to $114 million. We currently project NYT’s print ads revenues to continue to decline, in line with U.S. national print ad spending.

However, the online advertising division, which is the third largest division of NYT and makes up 25% of its estimated value, posted a 3.5% year-over-year increase  in revenues to $41.5 million in Q2. NYT continues to add content, especially video content, to its websites to increase user engagement and bolster online ads revenues. It now expects video advertising to nearly double in 2014, although it still represents a relatively modest portion of our total digital advertising revenue. Additionally, the company continues to experiment with custom advertising and has increased its product offering on mobile devices. We estimate 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.

Digital Subscription Boosts Circulation Revenues

According to our estimates, NYT’s print circulation and digital subscription division contribute over 45% to its stock value. During the quarter, circulation revenues were flat at $209.85 million. While NYT’s daily print circulation continues to decline, its digital subscriber base has continued to expand at a fast pace. In Q2, NYT’s paid digital subscriber base grew to 831,000. Digital subscription now accounts for nearly 20% of NYT’s circulation revenues as opposed to 13% in Q2 2012. During the quarter, the company has announced a host of new steps such as mobile apps to bolster its mobile platform and boost its digital subscriber base. We currently estimate that the number of NYT’s online subscribers will increase to around 1.4 million by the end of our forecast period.

We are in the process of updating our valuation to incorporate the Q2 2014 earnings. At present, we have a $8.33 price estimate for New York Times, which is 35% below the current market price.

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