The New York Times Company (NYSE:NYT) posted its results for Q1 and reported a 2% y-o-y decline in revenue to $466 million. Operating profit came in at $22.9 million compared to $12.6 million in the year ago quarter. Excluding depreciation, amortization and severance, operating profit rose 3.4% to $49.6 million from $48 million in the first quarter of 2012. It also reported a decline in earnings per share (EPS) from continuing operations, excluding severance and special items, at 4 cents a share compared with 5 cents in the same period last year. However, the stock rose 5.5% during the day’s trading session as the market warmed up to company’s newly released growth strategy.
While advertising revenues continued to decline (down 11% y-o-y), the firm saw growth in the circulation business. Circulation revenues grew 7% y-o-y driven by strong growth in digital subscribers and increase in subscription fee. We think this is a good sign as the digital business is key to New York Times’ success going forward. 
As we’ve stated previously, we expect New York Times to continue to focus on its digital subscription and online advertising products as they will help compensate for declining revenues from print advertising. Its growth strategy also focuses on increasing the digital subscriber base and launching new products.
Strategy For Growth
During this earnings call, CEO Mark Thomson disclosed NYT’s growth strategy. The company plans on leveraging its brand name and popularity to drive growth ahead. The new strategy focuses on product development and subscriber acquisition along with significant new capabilities in product management, customer management and distribution. Some of the planned initiatives are:
Focus on paid digital subscription and new products
NYT plans to launch a lower-priced paid product that will give access to limited content and another product that will offer access to additional content again for a low price. It also plans to launch a new product at a higher price point that offers extras such as the ability to gift subscriptions and provide full family access to “all digital access” and print subscribers. This strategy of selling itemized news articles at lower prices can lead to higher revenue but might decrease the average revenue per subscriber. We currently forecast the fee per online subscriber to decline from $25 to $21 by the end of our forecast period. With this strategy, the fee per online subscriber might decline at a higher rate, which might reduce our stock price estimate by 5%.
International expansion under a unified brand name
NYT announced that it will leverage its brand popularity to expand abroad and rope in new digital subscribers. Moreover, it plans to localize the purchase process so as to ease the adoption of its products. Through this strategy, NYT will acquire new subscribers for its online circulation business and unique users for its websites that will in turn increase the page views per unique visitor. However, international expansion, especially in emerging markets, might lower NYT’s fee per online subscriber for its online circulation division because international users have lower purchasing power than their US counterparts. Moreover, NYT’s online ads business might also suffer as international expansion will lower revenue per page view (RPM) as advertisers in these markets tend to spend lower dollar amounts on online ads. Currently, we estimate RPM to increase from $21 to over $26 by the end of our forecast period, however, international expansion can negatively impact our growth projections.
Emphasis on development of video content to acquire and retain users
The company recently appointed a new general manager for video production to lead its effort to scale its video business. This move signals that the company is increasing its online presence and diversifying its revenue streams. NYT began offering free unlimited access to The Times’s online video section in order to increase user awareness and engage more users. However, competition from incumbents such as YouTube is intense and it remains to be seen whether NYT’s video content can lure in new subscribers or not.
Focus on e-commerce growth and mobile apps
After the successful launch of its crossword franchise on mobile platform, NYT is also planning to offer more entertainment services through mobile application. If NYT is successful in this effort, it might translate into a higher user base for the company.
Digital Subscriber Growth Encouraging
The secular decline in the print newspaper industry combined with increasing online content consumption led to growth in digital subscribers during the quarter. The company’s paid digital subscriber base grew to over 700,000, a 45% y-o-y increase, and this highlights the value of the content that the company provides. If The New York Times is able to maintain the quality of its content, it might be able to maintain its digital subscriber growth rate over the next few years.
We currently estimate NYT’s number of online subscribers to increase to around 1.4 million by the end of our forecast period. However, if the number increases to 2 million, we would see 10% upside to the Trefis price. Conversely, if the number slows to around 1 million, the estimated value would decrease by 10%.
You can assess the impact that digital subscriber growth has on New York Times’ stock value by moving the trend-line in the chart below:
Brand Value Key
With national print ad spending and newspaper circulation on the decline, New York Times’ brand value along with its digital subscriber growth is central to its business health going forward. The firm faces immense competition in the online newspaper industry and will have a hard time attracting and retaining digital users if it is unable to maintain the quality of its content or if its growth strategy fails to deliver. We will have to wait and see if the company can grow its digital subscriber base at higher rates in the coming quarters.
We are currently updating our NYT model. At present, we have a $8.20 price estimate for New York Times, which is approximately 15% below the current market price.Notes: