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October 19, 2006

Dow Jones: Transition To Digital Underway But Too Early To Own

Dow Jones (DJ) reported earnings a day ahead of schedule due to the announcement of its acquisition of the 50% interest in Factiva owned by Reuters. Reuters and DJ formed a 50/50 joint venture for Factiva in the late 1990s. DJ will now control of Factiva and consolidate its financials. Factiva is a subscription based service sold to enterprises so they can search selected and tailored media content in specific applications.

DJ’s 3Q earnings and 4Q guidance were largely inline with street expectations so the acquisition of Factiva dominated the conference call. In general, management argued that the deal is very attractive financially and adds a solid mid single digit revenue growth business which further dilutes the company’s overall exposure to print advertising. Analysts seemed to accept this argument but appear concerned that Factiva has had decelerating financial performance this year and is subject to the same secular pressures from Google, free websites, and RSS that is negatively impacting the print business. I think the decline in the shares today is a sign of investor dislike of the Factiva deal....

DJ reported 3Q adjusted EPS of 11 cents, a penny ahead of estimates. The upside came from excellent expense controls as revenue trends deteriorated throughout the quarter culminating in a 6% decline in advertising revenue at the Wall Street Journal in September. Specific ad categories continue to perform in line with recent trends with technology and real estate weak and general ads and financial sluggish.

The Weekend Edition seems to be on target although management discusses the financial impact including the spillover to weekday advertising and overall circulation economics. This was not the case when the idea was announced which makes me think that the standalone Weekend Edition is underperforming expectations.

One weak spot in the quarter was an increase of just 12% in online advertising. Management attributed the subpar growth to a flat July and noted that MarketWatch is outperforming WSJ.com. August and September grew 20% and the forecast for 4Q is 20%. Given Yahoo’s comments about financial advertising and some general concern on display advertising I wonder if something larger might be at work.

4Q guidance calls for low to mid 40 cents in earnings on a low to mid single digit advertising gain at the Wall Street Journal. This is inline or slightly below current consensus.

Overall, I give DJ management credit for aggressively moving to limit its exposure to print advertising, attack its cost structure, and manage print revenues aggressively. The company seems to emulating the EW Scripps strategy although the growth profile of its diversification efforts is lower. Given aggressive management action and the natural fit of DJ’s content to the web, I am most interested in DJ shares as a potential buy among newspaper stocks. However, I still think the shares are too expensive and remain interested only on additional weakeness of 10-20%.

Posted by Steve Birenberg at October 19, 2006 03:20 PM in DJ