NYT Earnings: Digital Circulation And Subscription Initiatives Boost Revenues Yet Again

The New York Times Company (NYSE:NYT), one of the leading newspapers in the U.S., posted its Q2 results on August 6^th.  ((The New York Times Company Reports 2015 Second-Quarter Results, August 6 2015, www.nytco.com)) In line with our expectations, the company reported improvement in circulation revenue due to growth of digital subscription initiatives. Growth in digital subscription also resulted in cost declines, which outpaced the decrease in overall revenues. Digital ads revenues grew by 14% while print ads declined by 12.8%.  In this note, we discuss NYT’s results and trends in the industry in detail.

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Key Earnings Takeways

During the quarter, NYT’s revenues declined by just 1.5% year over year to $382.9 million from $388.7 million. Circulation revenues increased 0.9% and other revenues increased 4.5%, while advertising revenues declined by 4.5%. However, the company reported a 4.9% year-over-year decline in operating expense that resulted in a significant increase in operating profit to $38.05 million.

Outlook for Q3 2015

The company expects circulation revenues to increase by 0.5%-1.0% in Q3 2015 compared with the same period last year, as benefits from its digital subscription initiatives and an increase in print subscription prices bear fruit. Total advertising sales in Q3 FY15 are expected to decrease by mid-single digits compared with Q3FY14, 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 Q3 2015 compared with Q3 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.

Digital Subscription Boosts Circulation Revenues

According to our estimates, NYT’s print circulation and digital subscription division contribute over 54% to its stock value. During the quarter, circulation revenues grew marginally by 0.8% to $211.65 million. While NYT’s daily print circulation continues to decline, its digital subscriber base has continued to expand at a robust pace. In Q2, NYT’s paid digital subscriber base grew by 33,000 to 990,000 albeit at a lower pace as the company decided to make NYT Now a free product. As a result, not all subscribers from NYT now subscribed to the paid digital service. However, as the company improves content, we anticipate digital subscriber base will increase. Digital subscriptions grew by 13.8% to $47.5 million. 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.

Digital Ads Stem Decline in Ad Revenue, Expected To Grow At A Lower Rate In H2

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 12.8% 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 22.8% of its estimated value, posted a 14% year-over-year increase in revenues to $48.3 million in Q2, 32.5% of total ads revenues. This is the fourth consecutive quarter of double-digit growth in digital advertising revenue, indicating that the company’s content is generating momentum with ad buyers. Furthermore, this also indicates that NYT’s native advertising products – the paid post, and display video and mobile ads — are gaining traction. The company projects that its digital ad revenues in the second half would be lower than the first due to the base effect of changes in ad impression measuring parameters across the industry  whereby  advertisers only pay for impressions that have actually been viewed by users.

Cost Declines Yet Again

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 Q2 2015 earnings. At present, we have a $12.04  price estimate for New York Times, which is inline with the current market price.

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