(NYT) The New York Times Beats Expectations but Profit Dips

The New York Times Company (NYT) recently posted better-than-expected second-quarter 2011 results. The quarterly earnings of 14 cents a share beat the Zacks Consensus Estimate of 10 cents, but dropped 22.2% from 18 cents earned in the prior-year quarter.

The Zacks Consensus Estimate had remained stagnant prior to the earnings release with only 1 out of 4 analysts following the stock revised the estimate upwards in the last 30 days.

On a reported basis, including one-time items, the company posted a quarterly loss of 81 cents per share compared with an earnings estimate of 21 cents delivered in the year-ago quarter.

Let’s Dig Deep

The quarter reflects a favorable response to the digital subscription packages, increase in digital advertising revenue at News Media Group, improvement in circulation revenue and fall in attrition rate as subscribers to the New York Times’ print version are able to access content or articles online as well as on all applications of The Times for no additional charge.

The New York Times registered a drop in top-line during the quarter but the rate of fall decelerated sequentially. After declining 3.6% in the first quarter, total revenue slipped 2.2% to $576.7 million in the quarter under review from the prior-year quarter, and also fell short of the Zacks Consensus Estimate of $579 million.

The ongoing slump in the advertising market continues to weigh upon The New York Times Company, the publisher of The New York Times, the International Herald Tribune, The Boston Globe and 15 other daily newspapers. Total advertising revenue slid by 4% to $302.3 million in the second-quarter 2011, against a fall of 4.4% registered in the first quarter. The New York Times hinted that advertising revenue trends in the third quarter will be similar to the second quarter.

The New York Times Company also notified that it has been effectively managing its operating costs despite the rise in newsprint prices. Operating costs, excluding one-time items, portrayed a marginal decline of 0.6% to $493.8 million during the quarter. Management said that operating costs are expected to decrease in the low-single digits in the second half of the year with the fourth quarter experiencing most of the fall.

Segment Discussion

By segment, News Media Group revenue tumbled 1.3% to $548.9 million. Advertising revenue dropped 2.5% to $275.9 million. Print advertising fell 6.4%, whereas digital advertising jumped 15.5%. Circulation revenue remained flat at $234.9 million. Management now expects total circulation revenue to rise in the low-single digits in the third quarter. Adjusted operating profit for the segment dipped 7.3% to $77.2 million due to a fall in advertising revenue.

About Group segment’s revenue fell 17.3% to $27.8 million due to a fall in cost-per-click advertising. Adjusted operating profit plunged 19.1% to $14.7 million, reflecting a fall in advertising revenue.

Digital advertising revenue for New York Times’ Digital business, which includes NYTimes.com, About.com, Boston.com, climbed 2.6% to $84.6 million, and now accounts for 28% of total advertising revenue, up from 26.2% in the prior-year quarter.

Charging Readers for Online Content

Online advertising has now become an integral part of the company’s revenue stream with advertisers migrating to the Internet driven by increasing online readership and lower ad prices than print.

The publishing industry has long been grappling with sinking advertising revenue, with the recent global economic meltdown making the situation even worse. This comes in the wake of a longer-term secular decline as more readers choose free online news, thereby making the print-advertising model increasingly irrelevant.

To curb shrinking advertising revenue and seek new revenue avenues, the publishing companies contemplated charging readers for online content.

The New York Times Company on March 28, 2011 launched a pricing system similar to that of the Financial Times’ metered system, whereby after browsing a certain number of free articles, readers will be asked to subscribe to enjoy full access to its articles on phones, tablet computers and the Internet.

The New York Times Company has fixed monthly charges of $15 for access to more than 20 articles on its website and a smartphone application; $20 for unlimited access online and on Apple Inc.‘s (AAPL) iPad tablet computer application; and $35 for online, smartphone and iPad application.

The company also indicated that the users of NYTimes.com will be able to read 20 articles per month without spending a penny. However, readers visiting The New York Times Company’s website via blog links or social-media sites such as Facebook or Twitter will be able to access unlimited number of articles. But traffic reaching the company’s website through search engines such as Google Inc. (GOOG), Microsoft Corporation‘s (MSFT) Bing and Yahoo Inc. (YHOO) will be able to view five articles per day before being asked for a subscription.

We believe the success of the pay model depends on the accessibility of new articles across the Web. People will be reluctant to shell out if content is available free of cost elsewhere. However, The New York Times Company notified that the number of paid digital subscribers reached 224,000 at the end of the quarter.

Other Financial Aspects

The company ended the quarter with cash and short-term investments of $403.2 million and total debt and capital lease obligations of approximately $1,000.6 million. The New York Times Company incurred capital expenditures of approximately $11 million during the quarter. Management now anticipates capital expenditures between $45 million and $55 million for fiscal 2011.

The New York Times Company has been focusing on improving its liquidity position and debt portfolio. The company plans to prepay $250 million 14.053% notes on August 15, 2011. The maturity date of the notes is January 15, 2015. We believe that as the credit market has normalized and funds are available at cheaper rates, it is very prudent to repay the high cost obligations.

Consequently, the company will incur a loss of $46 million in the third quarter on account of the prepayment but will save over $39 million per year through January 15, 2015.

The New York Times Company remains committed to streamlining its cost structure, strengthening its balance sheet and rebalancing its portfolio. Currently, we have a long-term ‘Neutral’ rating on The New York Times Company. Moreover, the company holds a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating that correlates to our long-term view.

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