New York Times Earnings: Digital Services Boost Circulation And Advertising Revenue Even As Profitability Suffers

The New York Times Company (NYSE:NYT), one of the leading newspapers in the U.S., posted its Q3 results on October 30th. Even though the company rolled out new digital products (e.g., NYT Now, NYT Opinion and Times Premier) to bolster its digital circulation and revenues over the last two quarters, its print circulation and the related ad revenue continue to decline, reflecting the secular downturn in print industry. During the quarter, NYT’s revenues grew by just 0.8% year over year to $364.71 million from $361.73 million. Circulation revenues increased 1.3% and other revenues increased 2.7%, while advertising revenues were flat. However, the company reported an operating loss of $9.03 million on higher compensation and benefits expense, and marketing costs associated with the strategic growth initiatives in digital, as well as higher retirement costs.

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Outlook for Q4 2014

The company expects circulation revenues to increase by 1%-1.5% in fourth quarter of 2014 compared with the fourth quarter of 2013, as benefits from its digital subscription initiatives and the increase in print subscription prices bear fruit. Total advertising sales in the Q4 FY14 are expected to decrease at a mid-single digits rate compared with the Q4 FY13, primarily due to a challenging business environment in the print ads business. The company expects to incur a charge of $9 million in non-operating retirement expense in the 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: $35 million.

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 grew marginally by 1.3% to $206.72 million. 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 44,000 to 875,000. Digital subscription grew by 13.3% to $42.8 million, and now accounts for nearly 20% of NYT’s circulation revenues. During the quarter, the company announced a host of new steps (such as mobile apps) to bolster its mobile platform and boost its digital subscriber base.  It includes an improvement in content that is delivered through mobile apps at different price points. 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.

Print Subscription Revenues Stabilize

Over the past few quarters, NYT has been able to leverage its brand name and popularity to raise print subscription prices, which has helped the company to stabilize its print subscription revenues, even as volume continued to decline. As per our pre-earnings note, an increase in home-delivery prices of The New York Times more than offset a decline in print copies sold. We expect this trend to continue in the coming quarters, and print subscription revenue to stabilize. Currently, we forecast NYT Times weekly price to increase to $15.40 by 2020.

Digital Ads Stem Decline in Ads Revenue

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 5.3% year-over-year decline in print ad revenues. 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 16.5% year-over-year increase in revenues to $38.2 million in Q3. The primary reason for this growth was NYT’s native advertising product – the paid post. The company only introduced Paid Posts in January but will end the year with more than 30 clients. NYT continues to add content, especially video content, to its websites to increase user engagement and bolster online ads revenues. 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 ads offering on mobile devices such as Tap NYT which is a full-screen, self-propelled tapable story. We estimate these initiatives will improve user experience and 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 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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