NYT Earnings: Digital Growth Boosts Revenues Yet Again

The New York Times Company (NYSE:NYT), one of the leading newspapers in the U.S., posted its Q4 results on February 3rd. Even though its digital circulation and revenues grew over the past four 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 0.2% year over year to $444.7 million from $443.9 million. Circulation revenues increased 1.4% and other revenues increased 10%, while advertising revenues declined by 2.1%. Moreover, the company reported a 10% year-over-year decline in operating profit of $62.4 million on as severance expense associated with workforce reductions as well as retirement costs combined to offset slight growth in overall revenues.

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Outlook for Q1 2015

The company expects circulation revenues to increase by 1.0%-1.5% in first quarter of 2015 compared with the first quarter of 2014, as benefits from its digital subscription initiatives and the increase in print subscription prices bear fruit. Total advertising sales in the Q1 FY15 are expected to decrease at a mid-single digits rate compared with the Q1 FY14, primarily due to a challenging business environment in the print ads business. Operating costs and adjusted operating costs are each expected to be roughly flat in the first quarter of 2015 compared with the first quarter of 2014. In addition, the Company expects the following on a pre-tax basis in 2015:

• Results from joint ventures: Break even to $5 million,
• Depreciation and amortization: $60 to $65 million,
• Interest expense, net: $40 to $45 million, and
• Capital expenditures: $35 million to $45 million.

Digital Subscription Boosts Circulation Revenues

According to our estimates, NYT’s print circulation and digital subscription division contribute over 52.3% to its stock value. During the quarter, circulation revenues grew marginally by 1.4% to $210.55 million. While NYT’s daily print circulation continues to decline, its digital subscriber base has continued to expand at a fast pace. In Q4, NYT’s paid digital subscriber base grew by 35,000 to 910,000. Digital subscription grew by 13.6% to $44.5 million, and now accounts for nearly 21.13% of NYT’s circulation revenues. The company stated that it is on track to exceed the 1 million digital subscriber milestones in 2015. During the quarter, the company stated that products at lower price parity have tempered results and reduced average revenue per user (ARPU) to $16 per month. However, the company continues to improve the content that is delivered through mobile apps, and offer products at different price points. We currently estimate that the number of NYT’s online subscribers will increase to around 1.42 million by the end of our forecast period in 2021.

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 discussed in our pre-earnings note, an increase in home-delivery prices of The New York Times has 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 24.3% of its estimated value, has not been able to buck the trend and continues to report declines in revenue. NYT reported a 9.2% year-over-year decline in print ad revenues. We currently project NYT’s print ads revenues will 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 23.4% of its estimated value, posted a 19.3% year-over-year increase in revenues to $63.2 million in Q4. The primary reason for this growth was NYT’s native advertising product – the paid post. The company introduced Paid Posts in January last year but it continues to gain traction as client signings continue to increase. Furthermore, 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 ads offering on mobile devices. We estimate these initiatives will improve the user experience and boost the number of unique visitors to NYT’s website.  We also expect the unique visitor count to grow to 66.5 million by the end of our forecast period.

We are in the process of updating our valuation to incorporate the Q4 2014 earnings. At present, we have a $10.85 price estimate for New York Times, which is 21% below the current market price.

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