NYT Earnings: Revenues Decline Marginally As Company Reins In Costs

The New York Times Company (NYSE:NYT), one of the leading newspapers in the U.S., posted its Q1 results on April 30. In line with our expectations, the company reported improvement in circulation revenue due to a hike in home-delivery prices for The New York Times and digital subscription initiatives. These factors more than offset a decline in print copies sold. Furthermore, digital ads revenues grew by 10.7% while print ads declined by 11.1%.  During the quarter, NYT’s revenues declined by just 1.6% year over year to $384.23 million from $390.41 million. Circulation revenues increased 0.8%% and other revenues increased 6.5%, while advertising revenues declined by 5.8%. However, the company reported a 4% year-over-year decline in operating cost that would have resulted in a significant increase in operating profit had the company not taken a hit of $40.32 million for pension settlement charges. These lump-sum payments were made with cash from The New York Times Companies Pension Plan and will reduce the pension assets, not company’s cash. In this note, we discuss NYT’s results in detail.

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Outlook for Q2 2015

The company expects circulation revenues to increase by 0.5%-1.0% in Q2 2015 compared with the same period last year, as benefits from its digital subscription initiatives and increase in print subscription prices bear fruit. Total advertising sales in Q2 FY15 are expected to decrease by mid-single digits compared with Q2 FY14, primarily due to a challenging business environment for print ads. Operating costs and adjusted operating costs are each expected to decline in low single digit in Q2 2015 compared with Q2 2014. In addition, the company expects the following on a pre-tax basis in 2015:

• Results from joint ventures: Break even,
• 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 52.8% to its stock value. During the quarter, circulation revenues grew marginally by 0.8% to $211.47 million. While NYT’s daily print circulation continues to decline, its digital subscriber base has continued to expand at its fastest pace in the last two years. In Q1, NYT’s paid digital subscriber base grew by 47,000 to 957,000. Digital subscription grew by 14.4% to $46.1 million, and accounts for nearly 21.8% of NYT’s circulation revenues. The company stated that it is on track to exceed the 1 million digital subscriber milestone in 2015. Additionally, it continues to improve the content 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.

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 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 circulation price to increase to $12.51 by 2021.

Digital Ads Stem Decline in Ad  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 23% of its estimated value, has not been able to buck the trend and continues to report declines in revenue. NYT reported a 11% 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, making up 22.5% of its estimated value, posted a 10.7% year-over-year increase in revenues to $42 million in Q1. The primary reason for this growth was NYT’s native advertising product – the paid post, and display video and mobile ads. The company introduced paid post in January last year and 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 revenue. Additionally, the company continues to experiment with custom advertising and has increased its ads offering on mobile devices. We estimate these initiatives will improve user experience and boost the number of unique visitors to NYT’s website. We also expect the unique visitor count to grow to 59 million by the end of our forecast period.

Cost Declines

The company was able to rein in costs, mainly due to print distribution efficiencies as well as declines in depreciation and amortization, raw materials and outside printing expenses. It expects similar cost savings next quarter. We believe this should augur well for NYT’s valuation, and we will explore on this further in our next note on the company.

We are in the process of updating our valuation to incorporate Q4 2014 earnings. At present, we have a $9.64 price estimate for New York Times, which is 35% below the current market price.

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