The New York Times: A Sucker’s Rally

by Jonathan Berr | July 27, 2012 10:51 am

Shares of New York Times Co. (NYSE:NYT[1]), publisher of the namesake newspaper, surged 11% on Thursday after the company reported better-than-expected quarterly results.

The celebration is premature.

While circulation revenue at the New York-based publisher rose 8.3% to $233.3 million in the latest quarter, its advertising business was weak across the board, plunging 6.6% to $220.2 million. Moreover, digital advertising revenue, which is supposed to help offset the decline in the print business, fell 1.6%.

Overall, NYT posted a loss of $88.1 million because of the write-down in its moribund business. The quarter shows that the publisher may be off the critical list, but it’s in no shape to be discharged from the hospital.

The company’s guidance that “total advertising revenue trends in the third quarter of 2012 are expected to improve from the second-quarter levels due to better digital advertising performance across the Company” also should be taken with a grain of salt.

For one thing, that’s not saying much, given the poor performance of the business and the expected windfall that the Times will get from the presidential election and Olympics. Moreover, other newspaper publishers are also struggling to sell digital ads well. For instance, Washington Post Co. (NYSE:WPO[2]) reported an 11% decline in display[3] online ad revenue in the first quarter. Data from the Newspaper Association of America[4] showed that digital ad revenue at papers has dropped for five quarters in a row.

Forecasts for ad spending have been coming down. GroupM slashed its estimate for growth in global advertising spending to 5.1% from 6.3% because of economic uncertainties in the U.S. and Europe. U.S. spending will rise 3.6% this year and 3.1% next year, according to GroupM.

Advertising is one of the first things businesses cut when the economy sours, and newspapers, which are considered less cost-effective than new media, may get hit hard.

However, Gordon Borrell, CEO of market researcher Borrell Associates, is confident that advertising spending will rebound in the rest of the year. But he’s less so than he used to be.  “It’s going to be a very mild rebound,” he said in an interview.

Even the circulation revenue is less secure than it appears to be because many readers got great deals on tablet subscriptions that may be difficult to maintain. For instance, Gannett (NYSE:GCI[5]), the largest newspaper publisher, offers the iPad app for its flagship USA Today paper for free. In the last quarter, USA Today’s digital revenue rose 37.4%.

Readers of The Washington Post get complimentary access to the paper for a limited time. Perhaps CEO Donald Graham may be motivated to start charging after the 7% slump in the company’s online revenue in the latest quarterly report. The New York Times, which saw an 8.3% increase in circulation revenue in the last quarter, is currently offering 50% off a digital or home delivery[6] subscription through the end of the month.

While the iPad and other tablets aren’t going to be the savior of newspapers, they’ll certainly be a huge help. The Times earned more in circulation revenue in the last quarter — $194 million — than it did in ad revenue — $171 million. To succeed, papers are going to need both businesses to thrive, and their future is murky at best.

NYT has burned shareholders often in the past, and many investors are still reluctant to touch the stock. Even with Thursday’s run-up, the stock has barely budged this year. It will take a lot more than a one-day rally to change that.

Jonathan Berr does not own shares of the listed stocks. Follow him on Twitter @jdberr.

  1. NYT:
  2. WPO:
  3. reported an 11% decline in display:
  4. Newspaper Association of America:
  5. GCI:
  6. 50% off a digital or home delivery:

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