New York Times Earnings Preview: Digital Ads, Subscription To Boost Revenues & Margins

The New York Times Company (NYSE:NYT), one of the newspaper heavyweights in the U.S., is set to report its second-quarter earnings on Thursday, August 6th. While the secular downtrend in print media across the U.S. has impacted NYT’s topline, the company is focusing on offering a comprehensive suite of digital content, which includes both video and digital print offerings, to boost its flagging business. Overall, we expect that print advertising revenues continued to decline during the quarter and believe that New York Times’ digital subscription business will be key for the company’s profitability during the earnings announcement. We expect this result will give us insights into how NYT is faring in its endeavors.

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Outlook for Q2 2015

The company indicated that circulation revenues were 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 bore fruit. Total advertising sales in Q2 FY15 are expected to have decreased 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 have declined at a low single digit rate in Q2 2015 compared with Q2 2014. In addition, the company expects the following on a pre-tax basis:

• 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.

Margins And Cashflows To Improve

NYT’s core business has held on to its market share and its circulation revenue has grown largely due to strength in its digital subscription vertical. Furthermore, NYT was able to increase the subscription price for its circulation in 2015 due to strength in its brand and reach across different media, i.e., print and digital. In Q1, gross margins improved as newsprint cost declined. Considering the company’s high operating leverage, where in each incremental sale contributes more to the profitability of the company, we believe NYT’s gross profit and cash flow improved in Q2 as well.

Digital Subscription Expected To Grow

According to our estimates, the NYT’s print circulation and digital subscription division contributes over 54% to its stock value. While the NYT’s daily print circulation continues to decline, its digital subscriber base is gaining traction. In Q1 2015, NYT’s paid digital subscriber base grew by 47,000 to 957,000, and now accounts for nearly 22% of NYT’s circulation revenues. The company continues to add content, especially video content, to its properties in an effort to attract more users. Additionally, the NYT continues to leverage its brand popularity to rope in new digital subscribers, especially in new regions where it has expanded recently. We expect the NYT to show further improvement in online subscriptions in the quarter, and we will continue to watch this metric closely during this earnings announcement.

Digital Ads To Grow

The online advertising division, which is the third largest division of NYT and makes up 23% of its estimated value, posted a 10.7% year-over-year increase in revenues to $42 million in Q1 2015. The primary reason for this growth was NYT’s native advertising product – the paid post. 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, we expect it to increase substantially as the company adds more content and regions to its digital services. 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. In this earnings announcement, we continue to look for improvement in digital ads as the company continues to roll out new ad formats and content across its properties.

Print Subscription To 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 and boost margins. We expect this trend to continue in Q2 (especially since January is the month in which NYT increases its print subscription price), and print subscription revenue to stabilize.

Print Advertising Revenues To Decline

Print ads are the second largest division of NYT and makes up for ~23% of its value by our estimates. What was once the cornerstone of the business in terms of generating revenues, is now witnessing a fall due to changes in advertising behavior. Advertisers are allocating more of their budgets for online ads than for print ads. As a result, the U.S. print ad spending has declined from $22.8 billion in 2010 to approximately $15.9 billion in 2014. Overall, we think that this trend is likely to have continued in Q2 and expect print advertising revenue to decline.

We currently have a $12.04 price estimate for NYT, which is approximately 10% below the current market price.

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