New York Times Co.
/ (NYT-NYSE) / $17.45Note to Reader: This report contains substantially new material. Subsequent reports will have changes highlighted.
Reason for Report: 4Q07 and FY07 Earnings Update Prev. Ed.: January 02, 2008; News Update
Brokers’ Recommendations: Negative: 57.0% (4 firms); Neutral: 43.0% (3); Positive: 11.1% (0) Prev. Ed.: 4; 4; 1
Brokers’ Target Price: $13.50 (↓ $4.00 from the last report; 3 firms) Brokers’ Avg. Expected Return: (20.7%)
Recent Events - Summary
January 07, 2008: NYT and CNBC announced an agreement to share businesses.
January 25, 2008: NYT launched a text messaging service.
January 31, 2008: NYT reported its 4Q07 and FY07 financial results.
Overview
Analysts have identified the following issues as critical to an evaluation of the investment merits of NYT:
Key Positive Arguments / Key Negative ArgumentsSuperb Brands provide Pricing Power – NYT is successfully capitalizing on its brand name by pursuing a pay-for-premium content strategy. Despite price increases, circulation revenue has also increased. / Weak Pockets of Advertising – Weak ad spending in technology, retail, real estate, and entertainment has held back NYT’s growth. Movie companies’ switching to online movie advertising is also negatively affecting its revenue.
High Percentage of National Advertising – NYT’s flagship paper, The New York Times, derives about 65% of its advertising from national sources. / Fragmented Media Market – Some analysts are concerned that newspapers will lose share to newer media, such as the Internet and cable television.
Operating Excellence – NYT continues to expand both content and printing capacities. It is expected to benefit from such cost control measures as switching to lighter weight newsprint, IT consolidation, and real estate and head count reductions. / High Debt – NYT incurred high debt to fund an increased level of capital expenditure, which has led to an increase in interest expense. A rise in interest rates could create a liquidity crisis for the company, which would affect the ability of NYT to return capital to shareholders.
Successful Internet Strategy – NYT expects About.com, boston.com, and nytimes.com to sustain their 30% growth rates over the foreseeable future. / Voting Stock Closely Held – NYT’s dual class voting structure ensures that the Sulzberger family retains control of the company barring a more shareholder-friendly board from being elected.
Based in New York City, The New York Times Co. (NYT) has diversified interests in newspapers, broadcasting, and information services. Its two leading newspapers, The New York Times and The Boston Globe, account for nearly 78% of total revenue. In addition, NYT owns eight network-affiliated television stations, two radio stations, Internet-based media operations and the International Herald Tribune. NYT derives about two thirds of its revenue from advertising. The company operates in two segments: News Media Group and About.com. The News Media segment comprises The New York Times, NYTimes.com, and the International Herald Tribune; IHT.com, a newspaper distributor in the New York City metropolitan area; news, photo, and graphics services, as well as news and features syndication; and two New York City radio stations, WQXR-FM and WQEW-AM. This segment also comprises the New England Media Group, which includes The Boston Globe, Boston.com, and the Worcester Telegram & Gazette; and the Regional Media Group consisting of 14 daily newspapers in Alabama, California, Florida, Louisiana, North Carolina, and South Carolina, as well as related print and digital businesses. The About.com segment operates as an online source for information and advice on various topics.
NYT’s fiscal year ends on December 31. The company’s website is: http://www.nytco.com
February 04, 2008
Recent Events – Details
On January 07, 2008, NYT and CNBC announced an agreement to share business, technology and financial news and video online. The agreement calls for the Times to receive video and other online features from CNBC's Web site CNBC.com, while CNBC will get access to business and economics coverage from the Times's newspaper and Web site NYTimes.com.
On January 25, 2008, NYT launched a text messaging service that will deliver the latest news, features and columns from the newspaper as well as features from The Times Magazine to cell phones and mobile devices.
On January 31, 2008, NYT reported its 4Q07 and FY07 earnings. Highlights are as follows:
· Total revenue was $865.8 million in 4Q07 versus $931.5 million in 4Q06 and $3,195.1 million in FY07 versus $3,289.9 million in FY06.
· Reported net income was $52.6 million in 4Q07 versus a net loss of $660.9 million in 4Q06 and $109.0 million in FY07 versus a net loss of $568.1 million in FY06.
· Reported earnings per share were $0.37 in 4Q07 versus a loss per share of $4.59 in 4Q06 and $0.76 in FY07 versus a loss per share $3.93 in FY06.
Revenue
The Company reported total revenue of $865.8 million in 4Q07, a decrease of 7.1% from $931.5 million in 4Q06, while excluding the additional week in 4Q07, total revenues decreased 1.7% y-o-y. In FY07, total revenue was $3,195.1 million versus $3,289.9 million in FY06, down 2.9% y-o-y. As per the Zacks Digest average, total revenue in 4Q07 was $865.8 million versus $931.5 million in 4Q06. In FY07, total revenue decreased 4.1% to $3,195.1 million from $3,331.3 million in FY06.
Segment Revenue as per the Company Report
News Media Group
Total News Media Group revenue in 4Q07 decreased 8.0% to $835.0 million from $907.3 million in 4Q06, primarily due to the additional week. Excluding the additional week, total revenues decreased 2.7% y-o-y as a result of lower print advertising. In FY07, total news media group revenue was $3,092.4 million versus $3,209.7 million in FY06, down 3.7% y-o-y. As per the Zacks Digest average, total News Media Group revenue was $835.0 million in 4Q07 versus $907.4 million in 4Q06. In FY07, total revenue decreased 3.7% to $3,092.4 million from $3,210.1 million in FY06.
Advertising revenue in 4Q07 decreased 10.5% y-o-y to $539.8 million (in line with the Zacks Digest report), while excluding the additional week, advertising revenues decreased 5.6% y-o-y. In FY07, advertising revenue was $2,047.5 million versus $2,153.9 million in FY06, down 4.9% y-o-y. As per the Zacks Digest model, FY07 total revenue decreased 7.1% to $1,949.3 million from $2,098.5 million in FY06.
Circulation revenue in 4Q07 decreased 4.0% to $225.3 million from $234.7 million in 4Q06 (in line with the Zacks Digest report), mainly due to the additional week. Excluding the additional week, circulation revenues increased 2.6% y-o-y, attributable to higher home-delivery and newsstand prices for The New York Times. In FY07, circulation revenue was $889.9 million versus $889.7 million in FY06, flat y-o-y (in line with the Zacks Digest report).
Other revenue in 4Q07 increased 0.7% to $69.9 million, while excluding the additional week, revenues increased 5.5% y-o-y primarily because of 4.9% increased rental income from the company’s lease of five floors in its headquarters, coupled with higher commercial printing, which was partially offset by a decrease in subscription revenues for Times Select. In FY07, other revenue was $257.7 million versus $246.2 million in FY06, up 4.7% y-o-y. As per the Zacks Digest report, other revenues in 4Q07 increased 0.5% to $70.2 million from $69.8 million in 4Q06 and in FY07 increased 3.7% to $253.5 million from $244.6 million in FY06.
About.com
In 4Q07, revenue from About.com increased 26.8% to $30.7 million from $24.2 million in 4Q06. Excluding the additional week, revenues grew by 34.6% y-o-y driven by higher cost-per-click and display advertising and acquisitions. The increase was primarily due to higher display and cost-per click advertising as well as revenue associated with the acquisition of ConsumerSearch.com in May 2007 and two other smaller acquisitions. In FY07, segment revenue was $102.7 million versus $80.2 million in FY06, up 28.0% y-o-y. As per the Zacks Digest report, revenue from About.com increased 26.3% in 4Q07 to $30.4 million from $24.1 million in 4Q06. In FY07, revenue was $102.4 million versus $80.3 million in FY06, 27.6% y-o-y.
One analyst (Deutsche Bank) decreased the 1Q08 advertising revenue growth forecast from (2.9%) to (7.3%), and the total revenue estimate from (0.8%) to (3.6%). The analyst also decreased the revenue growth estimate from (0.7%) to (1.5%) and advertising revenue growth forecast from (3.0%) to (4.6%) for FY08.
Another analyst (Goldman) anticipates ad revenues for publishers to decline by 5.0%-10.0% y-o-y for FY08, owing to the secular challenges that the newspaper industry is facing in recent times.
Yet another analyst (Lehman) estimates ad revenue to decline 8.5% y-o-y at the NY Times flagship newspaper, 11.5% y-o-y at Boston Globe, and 8.1% y-o-y at the regional newspapers for FY08, while for FY09, the analyst estimates ad revenue to decline 5.0% y-o-y at the NY Times flagship newspaper, 6.0% y-o-y at Boston Globe, and 5.0% y-o-y at the regional newspapers. Furthermore, the analyst forecasts circulation revenue to increase by 2.4% y-o-y at the NY Times flagship newspaper (helped by a mid-2007 price increase), to decline by 2.9% y-o-y and 1.5% y-o-y at Boston Globe and at regional newspapers, respectively.
Total Company Outlook
One analyst (Lehman) forecasts total revenue of $3.057 billion and $2.993 billion for FY08 and FY09, respectively.
Provided below is a summary of revenue as compiled by Zacks Digest:
Revenue ($M) / 4Q06A / 2006A / 4Q07A / 2007A / 1Q08E / 2008E / 2009E / 2010ENewspaper Advertising / $603.1 / $2,098.5 / $539.8 / $1,949.3 / $437.6↓ / $1,826.9↓ / $1,768.8↓ / $1,743.9
Newspaper Circulation / $234.7 / $889.7 / $225.3 / $889.9 / $226.6↓ / $898.8 / $901.8 / $901.6
Other / $69.8 / $244.6 / $70.2 / $253.5 / $62.0↓ / $263.9↓ / $271.2↓ / $279.3
News Media Group / $907.4 / $3,210.1 / $835.0 / $3,092.4 / $726.1↓ / $2,989.6↓ / $2,941.9↓ / $2,924.8
About.com / $24.1 / $80.3 / $30.4 / $102.4 / $27.8↓ / $121.9↓ / $142.9↓ / $162.6
Total Revenue / $931.5 / $3,331.3 / $865.8 / $3,195.1 / $751.6↓ / $3,112.3↓ / $3,084.3↓ / $3,084.5
Digest High / $931.5 / $3,447.3 / $865.8 / $3,195.1 / $765.3↓ / $3,148.6↓ / $3,145.3↓ / $3,149.7
Digest Low / $931.4 / $3,289.7 / $865.8 / $3,195.1 / $737.1↓ / $3,056.7↓ / $2,993.0↓ / $2,982.7
Year-over-year growth / -1.2% / -7.1% / -4.1% / -4.4% / -2.6% / -0.9% / 0.0%
Sequential growth / 25.9% / 14.7% / -13.2%
Highlights from the Revenue table are as follows:
· For FY08, the range from $3,056.7 million to $3,148.6 million, with an average of $3,112.3 million (↓ from the previous estimate of $3,164.4 million).
· For FY09, the range from $2,993.0 million to $3,145.3 million, with an average of $3,084.3 million (↓ from the previous estimate of $3,142.5 million).
· For FY10, the revenue estimates range from $2,982.7 million to $3,149.7 million, with an average of $3,084.5 million.
A graphical presentation of segment revenue is given below:
Please refer to the Zacks Research Digest spreadsheet of NYT for specific revenue estimates.
Margins
According to the Zacks Digest average, total EBITDA decreased 11.5% y-o-y to $170.0 million in 4Q07 from $192.1 million in 4Q06. In FY07, total EBITDA decreased 5.0% y-o-y to $481.1 million in FY07 from $506.4 million in FY06.
Total operating profit was $101.5 million in 4Q07 versus an operating loss of $685.2 million in 4Q06 and was $227.4 million in FY07 versus an operating loss of $520.6 million in FY06. As per the Zacks Digest report, operating profit excluding the aforementioned items decreased 5.8% to $131.0 million in 4Q07 and 10.2% to $301.9 million in FY07.
In 4Q07, operating costs decreased 6.1% to $753.2 million from $802.3 million in 4Q06. In FY07, operating costs were $2,928.1 million versus $2,996.1 million in FY06, down 2.3% y-o-y. Excluding depreciation and amortization and the additional week, operating costs decreased 0.6% to $706.6 million in 4Q07 from $710.9 million in 4Q06, mainly as a result of lower newsprint expense and compensation costs, which were partially offset by increased staff reduction costs and professional fees. As per the Zacks Digest report, 4Q07 operating costs (excluding depreciation and amortization) were $721.5 million, down 6.5% y-o-y, and that for FY07 were $2,764.3 million, down 4.7% y-o-y.
Depreciation and amortization expense decreased 14.5% to $46.7 million in 4Q07 from $54.6 million in 4Q06, primarily due to accelerated depreciation expenses for assets at the Edison printing plant.In FY07, depreciation and amortization expense was $189.6 million versus $162.3 million in FY06, up 16.8% y-o-.
For FY08, the Company expects depreciation and amortization expense to be in the range of $160.0-$170.0 million, which includes approximately $5.0 million of depreciation expense associated with the plant consolidation project. Moreover, depreciation for the new headquarters building is expected to be $8.0 million per quarter. One analyst (Lehman) forecasts depreciation and amortization expense of $160.0 million and $155.4 million for FY08 and FY09, respectively.
Newsprint expense for 4Q07 decreased 30.3% y-o-y, with 16.0% of the decrease resulting from lower consumption and 14.3% from newsprint prices, while excluding the additional week, newsprint expense decreased 25.6% y-o-y, attributable to a 14.4% decline from lower prices and a 11.2% reduction from lower consumption.
Staff reduction cost was $17.8 million in 4Q07 versus $8.5 million in 4Q06.
Net interest expense decreased to $10.9 million in 4Q07 from $11.6 million in 4Q06. In FY07, net income expense was $39.8 million versus $50.7 million, down 21.3% y-o-y.
Net loss from joint ventures was $10.6 million in 4Q07 versus $1.3 million in 4Q06, owing to the write-down of 49.0% investment in Metro Boston and lower prices for newsprint and super calendared paper at the mills. However, the Company anticipates $12.0 million-$16.0 million income from joint ventures, for FY08.
News Media Group
In 4Q07, the Company’s operating profit at the News Media Group increased to $109.1 million from an operating loss of $675.6 million in 4Q06 while operating profit before depreciation and amortization (excluding special items) decreased to $161.0 million from $175.0 million in 4Q06, primarily due to lower print advertising.
Total News Media Group operating costs decreased 7.0% to $714.9 million in 4Q07 from $768.5 million in 4Q06. Operating cost, excluding depreciation and amortization and the additional week, decreased 1.3% to $674.0 million from $682.9 million in 4Q06, mainly as a result of the decrease in newsprint expense along with compensation costs, which were offset by increased staff reduction costs and professional fees.