Terrible Quarter For NY Times

New York Times reported terrible 1Q08 results. Adjusted EPS of 4 cents missed the consensus of 14 cents. Revenues of $748 million were a little short of the $752 consensus. 1Q07 EPS were 17 cents so this quarter represents a total collapse in profitability. Making matters worse, March advertising revenues decelerated further even after for adjusting the shift of low advertising Easter holiday into the first quarter vs. the second quarter a year ago. Most troubling was a marked slowing in national advertising, a category critical to NYT and one that that had thus far held up well. After hovering around flat or down very low single digits, national advertising fell 6% with management noting weakness in airlines and auto. Piling on, internet advertising grew just 12% in the quarter. About.com growth moderated to 15% implying that growth at newspaper sites, primarily NYTimes.com, had single digit growth.

Estimates will definitely be coming down although maybe not as much the results suggest since management is saying that some costs got pulled forward and planned cost savings are back end loaded in 2008. Regardless, the stock should come down more that the 2% decline so far today. NYT trades at a significant premium to other newspapers for two reasons. One reason is the disproportionate exposure to national advertising which has been holding up better than local advertising. This quarter probably will end up marking a turn in the relative fortunes of national ads.

The second reason for NYT's premium is activist shareholders who recently gained Board seats and are pushing for restructuring....

....I think this quarter supports my view that there is no value to be realized at NYT unless one assumes a sharp cyclical upturn starts soon in classified advertising or that secular pressures on print advertising will abate. If I believed those things, I'd rather invest in Gannett anyhow, which is much cheaper.

There really is no reason to write more. NYT is managing costs as tightly possible. NYT is trying to diversify to digital revenues (now 11% of revenue). There just is not anything they can do about the secular headwinds they face which are being exacerbated by cyclical pressures. This nugget pretty much says it all: March classified advertising fell 26%, composed of -3% for help wanted, -30% for real estate, and -20% for automotive.

New York Times: Still No Upturn in Sight

New York Times (NYT) reported mixed 1Q07 earnings. Results were basically in line with analysts estimates and recent management commentary but there were no signs that print advertising was stabilizing. Additionally, management lowered its forecasted growth rate for internet advertising in 2007 from 30% to something less than that without specifying a figure. Put this together and the moderate downtick in the shares today seems like the correct reaction. There is nothing going on at NYT that gives hope for the short-term and long-term initiatives to reduce the dependence on print advertising, while numerous and successful so far aren’t yet large enough to move the overall corporate results. I'd remain on the sidelines in NYT....

1Q07 EPS were 25 cents, slightly ahead of consensus of 21 cents. Revenues of $786 million fell a little short of the $797 million consensus estimate. The headline figures imply good controls and that was in fact the case. Excluding a one-time item that drove depreciation expense up 25%, total operating costs fell 2.3% led by an 8.5% drop in newsprint expense. Excluding the decline in newsprint expenses, operating costs fell by about 1.3%.

Unfortunately, advertising trends in the print publications remain very poor. Declines I low to mid single digits were evident in New York, Boston and at the regional papers. Boston showed a positive comparison but that was solely due to Easter timing. The problems remain retail and classified advertising. National ad trends were mixed but leaned to the positive side.

Internet advertising continues to grow rapidly but still only represents 9.5% of total revenue. During the quarter, About.com saw revenues increase almost 24% while the internet revenue from the newspapers rose by over 21%. These growth rates represent a modest slowing in growth and probably explain the reduction in the forecasted growth rate.

At 10% of revenues, a 20% growth rate in internet revenues adds 2% to the overall corporate rate. This is chewed up by a 2% decline in print revenues, something that still should be expected for the balance of the year. It is plausible that with organic growth and tuck-in acquisitions that overall corporate revenue growth could turn positive in 2008 assuming that internet advertisng can sustain a 20% growth rate.

Given this scenario, EBITDA growth should stabilize and the newly instituted dividend should be secure.

NYT has a very valuable franchise that is effectively being transitioned to the web (NYTimes.com is the 12th most visited site on the net). Additionally, management is being smart about tuck-in acquisitions and product development in key areas of strength like entertainment, fashion, and books.

This could get me interested in the stock at the right price but I still think that newspapers are headed toward trading at 6 times EBITDA, similar to other slow growth telecom and media assets. Until NYT and other newspapers stocks approach that level, I see little reason to be interested in the group.

New Tork Times Headline Remains: Do Not Buy

New York Times (NYT) reported EPS of 10 cents but adjusted for one-time items, the figure could be as high 16 cents. Guidance was 11-15 cents, so it looks like it can be called at the high end of guidance and ahead of consensus of 12 cents. Revenues look about $10 million light after adjusting for classifying the “for sale” TV stations as discontinued. So once again, it appears that strong cost controls saved a newspaper company from a really bad quarter. Of course, 16 cent is still a bad quarter, representing negative year over year growth.

NYT’s 3Q and September revenue trends in its publishing businesses were weak similar to its peers. NYT sounds a little more concerned about 4Q trends than some other newspaper companies which might account for the weakness in the stock so far today against a positive group. Advertising revenue was down 5% for the News Media group with NY down 4% and NE was down 12%. Management stated that declines in studio entertainment and help wanted accounted for all of the decline in NY. Auto remains weak overall and real estate is still strong as home inventories are up sharply....

About .com had 29% revenue growth this quarter including a weak 9% growth in September which was against an accounting juiced unusually large month a year ago. Trends at About.com remain solid. Including About.com, NYTimes.com, Boston.com, and the other newspaper websites, overall internet revenues were $63 million, or 85.% of the total. Growth was 24% in the quarter.

NYT is trying hard to transition toward a multiplatform approach by exploiting the national reach of the New York Times and completing smaller internet acquisitions. Along with strict cost control, plant consolidation, the Discovery Times sale, and the TV station sales, management is doing everything it can to reposition the company for the long-term and battle against the secular shift away form print advertising. Unfortunately, despite having unique strengths in the shift to the web due to the national reach of the paper, the headwinds are likely too stiff to sustain positive earnings growth.

In fact, the current consensus calls for a 10% decline in EPS next year. So, like most newspaper companies, the long-term story is unattractive and only sale of the company or a cyclical upturn in ad trends is likely to produce any near-term value for shareholders. And that near term value is not significant given the pressure on public and private valuations for newspaper assets.

The headline at New York Times remains: Do Not Buy.

About .com had 29% revenue growth this quarter including a weak 9% growth in September which was against an accounting juiced unusually large month a year ago. Trends at About.com remain solid. Including About.com, NYTimes.com, Boston.com, and the other newspaper websites, overall internet revenues were $63 million, or 85.% of the total. Growth was 24% in the quarter.

NYT is trying hard to transition toward a multiplatform approach by exploiting the national reach of the New York Times and completing smaller internet acquisitions. Along with strict cost control, plant consolidation, the Discovery Times sale, and the TV station sales, management is doing everything it can to reposition the company for the long-term and battle against the secular shift away form print advertising. Unfortunately, despite having unique strengths in the shift to the web due to the national reach of the paper, the headwinds are likely too stiff to sustain positive earnings growth.

In fact, the current consensus calls for a 10% decline in EPS next year. So, like most newspaper companies, the long-term story is unattractive and only sale of the company or a cyclical upturn in ad trends is likely to produce any near-term value for shareholders. And that near term value is not significant given the pressure on public and private valuations for newspaper assets.

The headline at New York Times remains: Do Not Buy.

NY Times Selling Its TV Stations

New York Times (NYT) announced that it is selling its TV station group. The group contains nine stations that management says will produce $43 million in earnings before interest, taxes, depreciation and amortization (EBITDA) in 2006. Recent transactions in TV have been around 13x EBITDA, potentially creating proceeds of $560 million. In the past, management has noted these stations have a low cost basis, so after-tax proceeds won't likely be that high.

The station group represents around 5% of NYT's total business, so this is a marginal deal. Analysts will like the fact that they are eliminating a slow growing business facing secular challenges. The digital businesses immediately grow as a percentage of the overall pie. Analysts will also be pleased that NYT management can be more focused on its most important operations.

I am pleased to see the divestiture announcement, but I don't think it represents a signal to get long NYT. The challenges in newspapers are too high, and signs of a cyclical pickup in advertising remain nonexistent.

New York Times: Still Struggling

New York Times (NYT) reported adjusted EPS of 46 cents in line with guidance. Most key financial measures closely matched analyst estimates including revenues, costs, and margins. As with Gannett (GCI) and Tribune (TRB), advertising and circulation trends were weak and there is no sign of an upturn. NYT and its peers continue to effectively reduce costs but these efforts are only to limit the damage from the weal top line environment. I see little reasont o be interested in shares of NYT or other newspaper companies which could still suffer significant multiple contraction as despite the secular growth challenges, multiples remain at the low end of historical valuations. I see no reason why multiples should not be reset lower....

Along with its earnings report, NYT announced the retirement of its CFO and a revamping of its NY printing facilities. There is nothing negative to read into the CFO retirement. The reorganization of the printing facilities will allow the company to consolidate its printing presses in its most modern facility and reduce the width of the paper from 54 inches to 48 inches in 2008 (same as USA Today is now and same as the Wall Street Journal will be next year). The printing changes will cost $150 million in capital spending although the net impact may be as low as $100 million as the older plant won’t require prior planned spending. Management said that the ROI on the change is 15% with a 5.5 year payback and annual savings of $42 million or 18 cents per share. This seems like a good plan despite the use of free cash flow although it does indicate to me that management expects revenue challenges to remain for the long-term.

Looking more closely at the quarter, The NY Times group was up slightly, the Regional newspapers and broadcasting were up low to mid-single digits and the New England group was down 10%. In general, real estate remained an area of advertising strength while auto and entertainment continue to be weak. Auto and entertainment and many other categories continue to lose share to the internet, a change I see as continuing in the future and permanent. New England should improve in 2007 as consolidation of retailers in 2006 will shift to expansion by national retailers like Nordstrom in 2007.

Digital continues to be a bright spot and NYT has a unique position among its peers with its national brand and separate platform in About.com. Revenues at the newspaper affiliated websites rose 25% in the quarter, while About.com had a 63% gain. The newspaper internet revenues are included in the flat overall revenue so in reality, print advertising trends are negative. Digital revenues now equal almost 8% of revenue, up 200 points from a year ago but still too small to lift the total company back into a growth mode.

TimesSelect now has 513,000 subscribers but only 37% are paying. The rest receive it as part of their print subscription. Growth is not high but there are benefits from subscriber retention and the ability to sell Times Select online inventory at premium prices.

Looking ahead, management did not tweak guidance beyond the reorganization of its printing presses. This means more of the same for the rest of the year. That won’t be enough to get the stock moving. In fact, July is off t a slow start, described as "challenging" by management. This could lead to estimates coming down slightly.

New York Times: Decent Quarter But I Am Not A Buyer

New York Times (NYT) shares are rallied more than 2% yesterday following a decent 4Q05 earnings report. The advance is more notable given that the other newspapers tocks are all in the red today despite strong market breadth.

NYT reported adjusted EPS of 64 cents, ahead of the 59 cent consensus and the company's 59-62 cent guidance. Revenues matched consensus at $931 million. While management spoke optimistically about year end strength in advertising revenues, when I compare the press release to a couple of analyst models, it looks to me like most of EPS surprise came form non-operating items including a large jump in joint venture income. Nevertheless, the company's December revenue report was better than expected with ad revenues rising over 8%, including a gain of greater than 5% after excluding About.com. This strength was probably foreshadowed by the positive pre-announcement from Dow Jones (DJ), another company that is heavily reliant on national advertising. Overall, I'll give NYT the benefit of the doubt and call the quarter as slightly better than expected....

Regarding guidance, management laid out a lot of assumptions for 2006 but the figures are not specific to the income statement. Rather, the company announced things like a 4% price increase for subscriptions and the expectation of "very strong growth" in the digital properties. I don’t think this guidance will change analyst estimates very much, especially since the company admitted that December strength has turned into January weakness primarily due to weak spending by movie studios. January is a small month, but given the false starts and disappointing growth in 2005, I don’t think analysts will move up numbers until there are several more months of good revenue growth.

A few other highlights from the press release and the conference call:

• Cost controls continue with non-newsprint cash costs rising less than 3%. Management is trying hard to limit expense growth which should mean operating leverage will emerge if the fourth quarter strength in ad revenues continues
• Times Select, the company's fee-based online content has acquired about 390,000 subscribers of which 40% are not print subscribers. This doesn’t seem like a large number to me but analysts don’t seem bothered.
• Circulation issues remain a problem. At the Times, circ revenue fell 1%, in Boston, the decline was 7%. Only the company's small regional papers managed to produce positive circulation revenue.
• Despite circulation issues, the company announced a 4% price increase for subscribers for 2006. All else equal this will boost circulation revenue about 1% in 2006 but the impact on the total company is only about 25 basis points.
• Real estate, help wanted, color, corporate, financial services, telecom, and fashion were strong advertising categories, while entertainment and pharma were weak.

I remain on the sidelines at NYT and the entire newspaper group. The stocks are trading at the very low end of historical valuation ranges but most other media sectors are trading at all-time low valuations. Given that the secular challenges are greater at the newspapers, I don't think newspapers are cheap enough. I understand the contrarian call, particularly at NYT and DJ where operating leverage could be high if recent improvement in national ad trends proves sustainable. Additionally, the potential acquisition of Knight Ridder (KRI) could excite investors about the group. However, I think we have reached the tipping point on the group regarding the internet threat that accelerates as time passes due to demographics. It is not a battle I want to fight unless the stocks get unusually cheap.

New York Times: Fourth Quarter Earnings Preview

There should not be too many surprises when New York Times (NYT) kicks off the earnings season for newspaper companies before the open on Tuesday. In late December the company preannounced the quarter and guided to 59-62 cents excluding 14-15 cents of severance costs.

The company experienced somewhat better revenue growth in the fourth quarter as national advertising trends picked up slightly. However, NYT continues to face headwinds due to weaker than expected national ad trends, particularly in the entertainment, travel, and wireless industries.

The fact that newspaper companies are hurting is nothing new. Even though NYT is staring at a drop in earnings of 15% for 4Q05, the big question is whether there is hope for recovery in 2006. Presently, analysts are expecting a flat year for EPS at around $1.59 vs. $1.55 in 2005, beginning with a 1Q06 report of 29 cents vs. 30 cents a year ago. To reach a positive earnings comparison for the year, analysts are assuming 3% top line growth. The 3% figure includes revenues from the company's internet properties including About.com and NYTimes.com. These properties are experiencing much faster growth so the implication is that print advertising and subscription revenue will barely be growing in 2006.....

As previously mentioned, a slight uptick in ad trends in October and November offers some hope that revenues in 2006 will improve. This means there will be a lot of focus on the company's December revenues and any comments about the outlook. Analysts will also be looking for some numbers on the companies move to put a lot of content behind a paid subscription model. I subscribe to New York Times Select for $40 a year. This gives me access to certain columnists and free archives. I'll also be interested in margins trends. Margins are under a lot of pressure (probably down 300 basis points or more in the December quarter). Layoffs and other cost controls are battling against rising newsprint prices and increasing compensation costs primarily due to benefits.

I have been very consistent calling to avoid the newspaper group unless you believe advertising trends can pick up to the mid-single digits which will provide operating leverage. I stand by that opinion as I believe current valuations, which are at the low end of historical standards, are accurate. The industry faces huge challenges and the accelerating loss in subscribers in 2006 means that investors will not reward the industry with higher multiples. In fact, I would argue that multiples hould be lower givent he secular challenges and in comparison to other media sectors that offer higher growth potential. I do not believe 2006 will see a big upturn in revenue trends for NYT or the group. A buyout of Knight Ridder at 10 times current year EBITDA will provide support for the group but it will also max out the multiples. Putting a 20% public market discount on the group means the stocks are appropriately valued assuming 2006 witness a slight up year. Too boring for my blood with estimate risk still to the downside.

New York Times: Still Too Early

Maybe it is the redundancy of listening to my fourth newspaper conference call this earnings season but I found little of interest in the New York Times (NYT) earnings release or conference call. The company slightly exceeded its sharply reduced guidance, reporting 21 cents before adjustments against guidance of 15-20 cents. Revenue, expense, and margin trends appear close to analyst estimates so the variance appears to be non-operating. Revenues of $791 million were up 1% against a year ago indicating the tepid environment the company and the industry faces....

Although I didn�t hear anything on the call that excited me, the shares began the call trading down 1% and concluded the call trading down almost 3%. I don�t think a seller was reacting to the call specifically but rather someone else just threw in the towel.

NYT faces a slightly tougher operating environment than other newspapers because it has added expenses of maintaining a national brand while also suffering fro advertising weakness that is concentrated in national categories. Based on commentary on the call it appears that the elevated expenses (low to mid-single gidit growth) will continue into 2006. Therefore, without an acceleration in the top line, hope for earnings growth is minimal. Urrent consensus for 12006 calls for 5% EPS growth.

Highlights of the call include:

� At the New York Times paper ad trends improved in the second half of September with the improvement continuing so far in October. More movie advertising was mentioned as a contributor.
� Trends at the Boston Globe remain poor with negative ad growth in 3Q (NY was up). I wonder if the Red Sox World Series victory in 2005 might add a tough comp in 4Q.
� About.com is growing very rapidly (up 67%) but remains a tiny portion of the company with revenues of just $14 million in the quarter, only 2% of the corporate total.
� The company spoke positively about the initial reaction to TimesSelect noting that the archives as much as the content were helping to drive subscriptions.
� In response to an analyst question, management said it had no plans to increase the pace of its share buyback despite the dramatic decline in the stock price.

NYT remains low on my list of potential investments in the newspaper industry. The stock isn�t cheap compared to its peers and faces more challenging fundamentals. I also wonder whether as a national brand the internet challenge means that NYT's ad growth issues have more secular aspects than its peers.