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Martha Stewart Living Omnimedia, Inc. (NYSE:MSO)

Q4 2012 Earnings Call

February 26, 2013 08:30 am ET

Executives

Dan Taitz – Chief Administrative Officer & General Counsel

Ken West – Chief Financial Officer

Katherine Nash – Vice President Corporate Communications

Analysts

David Bank – RBC Capital

Michael Kupinski – Noble Financial Group

Operator

Good morning and welcome to the Martha Stewart Living Omnimedia Q4 and Full Year 2012 Earnings Conference Call and Webcast. (Operator instructions.) At the request of Martha Stewart Living Omnimedia, this call is being recorded. Anyone with objections should disconnect at this time. At this time it is my pleasure to introduce Katherine Nash, VP Communications and Investor Relations of Martha Stewart Living Omnimedia. Katherine, you can begin when you’re ready.

Katherine Nash

Thank you and good morning, everyone. Welcome to Martha Stewart Living Omnimedia’s Q4 and full year 2012 earnings conference call. Before we begin let me remind you that our discussions will contain forward-looking statements which are made pursuant to the Private Securities Litigation Reform Act of 1995 as amended. These statements are not guarantees of future performance and involve certain risks and uncertainties which are difficult to predict. Actual future results or trends may differ materially from what is forecast in forward-looking statements due to a variety of factors, many of which are described in our SEC filings.

Also, non-GAAP numbers are reconciled to GAAP in an attachment to our press release which appears on our website at www.marthastewart.com. Thank you and now I’ll turn the call over to Dan Taitz.

Dan Taitz

Good morning. Thanks for joining us. As we announced on January 29, I am filling the role of Principal Executive Officer of MSLO on an interim basis during MSLO’s CEO transition process. For those who don’t know me, I joined MSLO in August, 2011, and have served as Chief Administrative Officer and General Counsel, and I am continuing to fill those roles during the transition. On behalf of the Executive Team and the Board of Directors, Ken and I would like to thank Lisa Gersh for her contributions to the company and wish her the best in her future endeavors.

In a moment Ken will address our Q4 and 2012 financial results, but I first wanted to comment on two items that are almost certainly on your mind. Our search for a new CEO is progressing. I can report that the directors leading the search have met with highly qualified candidates. We will update you when we have an announcement to make.

The second item is the contractual dispute between MSLO and Macy’s. We are not going to speculate about the outcome of the ongoing trial or make any other comments regarding the status of the case during this call. When the outcome is known and we’re in a position to comment on any impact on our business we’ll share this information. As we have said in the past, we continue to be on track with the launch at JC Penny next quarter. With that, I’ll turn the call over to Ken.

Ken West

Thanks, Dan, and good morning everyone. I’ll review our business progress in Q4, put some perspective around 2012 as a whole, provide some early insights about our views for Q1 2013 and then Dan and I will address your questions.

In Q4 we delivered results that came in a bit better than expected in a few respects. Despite a 9% decrease in revenue to $56.4 million, our adjusted EBITDA for Q4 was $6.6 million, more than double the $3.3 million in the prior year’s Q4. Operating income was modestly positive at $1.4 million, up from approximately breakeven last year; and basic and diluted net income per share came in at $0.02, down from $0.07 in the prior year.

In broadcasting, we benefited from about $1.2 million in residual payments primarily for television programming distributed in several international markets. The timing of these payments was not factored into the outlook I provided last quarter. We had a good quarter in merchandising and also saw a slightly better performance in publishing than we had anticipated. Our operating net income for Q4 2012 included $3.5 million in charges primarily related to the restructuring moves in our media business. The year-ago Q4 saw a benefit to net income of $4.7 million primarily reflecting a gain on the sale of the company’s equity interest in WeddingWire.

Quickly recapping full year results, our adjusted EBITDA was a positive $0.5 million compared with a $4.0 million loss in 2011 despite an 11% decline in revenue. Our operating loss for 2012 was $56.4 million against a loss of $18.6 million in 2011, largely a result of the restructuring charges in our media business and the $44.3 million non-cash impairment charge reflecting the write down of goodwill recorded in Q3. As a result of the restructuring initiatives in publishing, we believe the company is now positioned to deliver sustainable performance improvements.

Turning now to our Q4 segment performance, starting with publishing: publishing revenue of $35.3 million for the quarter was off 9% from the prior year with print advertising revenue down about 6% and digital advertising revenues down 4%. We actually saw a slightly better print result than we had forecast including a 9% year-over-year increase from Martha Stewart Living in the January 2013 issue, but this was offset by continued challenges with circulation revenue especially at newsstands.

The adjusted EBITDA loss in publishing for the quarter of about $0.7 million reflects our soft revenue performance. The results for the quarter had only a nominal impact from the announced restructuring activities due to the timing of their implementation, so we plan to first realize the benefits of the activities beginning in Q1.

To quickly recap the actions taken, we have transformed the Every Day Food brand by eliminating the standalone print product and leveraging the brand into a more video-focused, digital media property. We are building on the successful daily video series sent to our digital subscribers and distributed on our platform partners while also repositioning EDF print content in the form of occasional supplements in Martha Stewart Living.

Second, we closed our title Whole Living. In January we sold the title’s customer list generating a gain of approximately $3 million that will be reflected in our Q1 2013 results. As a result of these changes at Every Day Food and Whole Living our overall workforce has been reduced by about 12%, primarily in our publishing unit. I should also note, subsequent to these actions, we notified advertisers of our plans to reduce the number of annual issues of Martha Stewart Living from 12 to 10 beginning this year.

Altogether these actions eliminate an estimated $35 million in annual publishing costs and related revenues. As a result of these actions we think we will see the full year net benefit to EBITDA of approximately $5 million to $7 million in 2013. Note that the anticipated benefits of the reduced schedule for Martha Stewart Living were included in these figures when we disclosed our restructuring plans before.

Going forward, we believe we have a leaner, more focused publishing business with solid assets. Both Martha Stewart Living and Weddings are strong competitors in their categories. Living has gotten off to a good start in 2013 with a 14% increase in ad pages sold in the March issue following 11% and 9% increases in the February and January issues respectively.

These increases result in part from the attraction of several new large advertisers that have made commitments with us throughout the year. However, it’s important to note that these types of advertisers often get better rates as a result of their size and commitment level, so our revenue in Q1 will not track with our paging especially considering that we are comparing against a Q1 a year ago that included certain high-rate paying advertisers in categories like pharmaceuticals that did not repeat this year. Overall however, we are encouraged with the traction of our sales force in gaining with major advertisers.

On the digital side, as we indicated in our publishing restructuring announcement last fall, we continue to accelerate our plan to deliver our lifestyle offerings over digital, mobile, and video platforms. December unique visitors totaled 8.7 million, our third consecutive monthly record. In the food category we ended the year the sixth most visited site according to ComScore and interestingly, roughly a third of our visitors now come to us through mobile devices.

We’re also generating growing views of videos on www.marthastewart.com and our partner network. During the holidays, our original web series “Martha Stewart’s Countdown to Christmas” generated more than 15 million views across www.marthastewart.com and partner platforms, most notably on the AOL On Network. Overall we served more than 26 million video views across these platforms in December to over 3 million unique users.

It’s important to note that while our web video properties are evidence of our new lower-cost strategy in video, the advertising revenues we plan to generate from this program will be included in our digital revenue – part of our publishing segment, not in broadcasting. We are hopeful as we expand our presence in this category that we will succeed in growing our digital revenues.

In our merchandising business, we achieved a targeted 70% adjusted EBITDA margin in the quarter and also finished the full year at that same number versus 62% in 2011. I am pleased with our ability to deliver solid growth and improved operating leverage in this business especially in light of the softness we saw in a few categories, namely paint and soft flooring at the Home Depot.

Q4 merchandising revenues were up 24% year-over-year and adjusted EBITDA was up 30%. Important contributors in the quarter included an increase in royalty revenue from Macy’s and our contribution from partnerships with JC Penny and Avery.

Looking at broadcasting, we are seeing positive consumer reaction to Martha Stewart’s Cooking School on PBS which ranks #1 among public television cooking shows with women ages 50 to 64 and third overall in household viewing. The show is being carried in nearly all of the nation’s 189 PBS markets.

Finishing up the segment discussion, our corporate expenses were $7.5 million in Q4, up from $6.5 million in the prior year principally due to legal and other professional fees and in line with our forecast. Legal fees related to the Macy’s litigation amounted to approximately $800,000 in the quarter.

Quickly reviewing the balance sheet at year end, MSLO has cash and equivalents and short-term investments of $49 million at December 31 and no debt. Before getting to our Q1 outlook I’d like to offer a couple of concluding thoughts on full year 2012. After writing down the value of intangible assets in our publishing business we took a number of major strategic steps this year that were necessary to improve performance for the long term. The biggest was the reset of our publishing business and the complete rebuild of our advertising sales force.

In broadcasting, we exited the business of daily live program production and refocused on cost-effective platforms for content delivery. Together, the publishing and broadcasting initiatives generated an estimated $45 million to $47 million in annual cost reductions, a very significant number for a company with roughly $200 million in annual operating expenses. While some of these savings are being invested in our digital business as we accelerate our strategy to deliver content over multiple platforms, we continue to expect adjusted EBITDA to improve in the range of $5 million to $7 million this year.

Let’s now turn to our outlook. In talking about Q1, please note that due to the ongoing trial in the Macy’s contractual dispute we are assuming no impact to our current business that would affect the first three months of 2013. And as Dan noted in his opening remarks, once we know the outcomes of litigation we will be in a position to discuss our visibility going forward.

Publishing revenue is expected to be down in the low- to mid-teens compared with the prior Q1 and there are a few moving pieces involved here. First, keep in mind that the quarter will include only minimal revenue related to Every Day Food which has been restructured and Whole Living, which has been closed. The overwhelming majority of the revenue decline can be attributed to the discontinuance of these titles.

Second, I mentioned the approximately $3 million gain from the sale of the Whole Living customer list. The majority of this income will be reflected in publishing revenue with the balance reflected below the operating line as a gain on sale. For our ongoing publishing businesses, we expect MSLO’s advertising revenue to be down 5% as a better page performance will be offset by a customer mix favoring larger but lower-rate paying advertisers. We are also comparing against a quarter last year that included unusually high pharmaceutical advertising which by nature can be unpredictable in our magazines. Meanwhile we expect Weddings to be flat in the quarter and we expect digital revenue to be up in the low double-digit percent rate in Q1.

Adjusted EBITDA for publishing is anticipated to show a narrower loss compared with the prior year quarter. Now please keep in mind that we will see higher expenses in our digital business due primarily to costs and investments related to digital growth initiatives including video projects. Also as you know, last year in the first half we were making significant hires in advertising sales. We will have the full impact of these hires this year compared to a smaller impact in the first half of last year.

In merchandising, we expect revenue for Q1 to be down in the mid-teens from a year ago. A few items to keep in mind with respect to merchandising: first, we expect certain items to begin appearing in JC Penny stores before the end of the quarter but we will not benefit from Penny’s larger Home launch until Q2. Last year’s quarter included the benefits of two smaller contracts that have since expired as well as a modest one-time true up payment from one of our retail partners. Absent these items, revenue would be approximately flat year-over-year.

The flat revenue excluding the aforementioned items reflects continued softness in sales at the Home Depot of our soft flooring and paint lines as communicated in prior quarters. In addition, the Home Depot is featuring fewer Martha Stewart patio styles than in the prior year. We anticipate that the smaller patio assortment and continued weakness in soft flooring and paint will create a revenue headwind for us this year. Overall, the Home Depot continues to be a very important partner and we are anticipating solid performance in many of our other major categories.

While we anticipate providing more information on our overall merchandising outlook once we know the outcome of the Macy’s litigation, I do want to note that we continue to anticipate modest revenue and adjusted EBITDA growth in merchandising for the full year prior to accounting for the impact if any from the Macy’s litigation.

Getting back to Q1, in light of the anticipated revenue performance, higher expense attributable to certain cost allocation changes across segments as well as staffing costs in support of the JC Penny launch and the absence of the concluded partnerships and true up I described earlier, merchandising adjusted EBITDA is expected to be between $6.0 million and $6.5 million. In broadcasting, we are not anticipating material revenue or adjusted EBITDA contribution in Q1. Corporate expenses in Q1 will be approximately $8 million inclusive of anticipated litigation costs.

Adjusted EBITDA loss on a consolidated basis at the company is expected to be in the range of $3.0 million to $3.5 million. Thanks again for joining us and that concludes my prepared remarks. The operator will now begin the question-and-answer session.

Question-and-Answer Session

Operator

Thank you. The floor is now open for questions. (Operator instructions.) Your first question comes from the line of David Bank with RBC Capital.

David Bank – RBC Capital

Hey, thanks, good morning everybody. A couple of questions. I guess the first one is a while back you guys folded the digital division into publishing and it seems as though some of the traditionally broadcast opportunities have also been sort of folded into digital. So the first question I have is can you talk about of the video business specifically, how much of that business right now is kind of advertising revenue versus license-oriented revenue, and how do you see the trajectory of those revenue streams over the next couple years?

The question is sort of on a related basis, can you talk about where you are with the synergies I guess between publishing and digital at this point? How far along do you think you’ve come, what’s sort of left to realize – not just from a pure cost perspective but conceptually?

And then I guess lastly, can you yourself talk about digital growth rates as distinct from publishing? But you don’t really break out the numbers so I guess I thought I’d give it a shot and say what’s the base of revenue for each one? Thanks for taking so many questions.

Ken West

Dan, do you want to take the first couple of questions and I’ll take the last one on growth rates?

Dan Taitz

Sure. So good morning. In terms of, I’m going to address them a little bit out of order. In terms of synergies, that’s something that’s very much on our mind. We’re seeking to become more of an integrated content company, meaning developing content for use on all of our platforms in an integrated way from beginning to end.

And that’s something that’s challenging all traditional publishers and we’re finding the same challenges, but we think we’re making a lot of progress and we think there’s a lot of opportunity that remains there; and that will result in I think better content, meaning the way content appears in print stories, on the internet, on our digital editions of our print magazines as well as through video on the internet as well. And I think there’s also opportunity for cost savings as we better integrate those content-generating teams.

In terms of license fees and ad revenue, today and I think in the near future we’re definitely generating the bulk of our revenue from advertising. I think that the opportunity for licensees will continue to be present on traditional television and we’re pursuing opportunities that will result in future licensees although there’s nothing material currently on the table. And I think as the internet continues to mature the opportunity to have pay-for-content subscription revenue and the like will continue to grow but that’s not something that we see as a material contributor this year.

David Bank – RBC Capital

Okay.

Ken West

And David, with respect to what we anticipate for the digital growth rate as we continue to invest in how-to type videos that are our own culture and our specialty and expertise, we do anticipate a growth rate of at least 20% over 2012. So we think it’s going to be substantial and to our benefit.

David Bank – RBC Capital

Can you say what that number was in 2012?

Ken West

In 2012 our digital ad revenue was approximately $21 million.

David Bank – RBC Capital

Okay, thanks so much.

Operator

Your next question comes from the line of Michael Kupinski with Noble Financial.

Michael Kupinski – Noble Financial Group

Thank you and thanks for taking the questions. Obviously the numbers came in better than expected even if you factor in the charges that you had in the quarter. Just a couple of things – if you look at the broadcasting group in general, obviously you had a benefit from the international sale there. If you factor that out the broadcasting team has done what I was looking for. Is there a way that obviously with the change, with the PDF strategy is there a way to kind of factor or give us some idea of what we can look for on a run rate basis for the broadcasting division?

Ken West

Mike, with respect to broadcasting we structured it right now without being producers actually of any substantial shows with live audiences, which we terminated as you’ll remember in the middle of 2012. We don’t anticipate any significant revenue but more importantly any significant cost associated with our activities in broadcast. So the Cooking School is a very popular show on PBS – those costs are in the can for the next season. We also have another show coming up called Martha Bakes, also on PBS and that’s using repurposed content that we had on a show of similar name and structure edited and modified to fit the new audience under PBS, and that’ll be played out starting in the middle of 2013. But again, we don’t anticipate any significant EBITDA contributions from these activities but they are continuing to make impressions. And I think that’s most important to push merchandise and everything else we do at Martha Stewart.

Michael Kupinski – Noble Financial Group

And then if we look at the magazine segment, obviously there is significant consolidation in the magazine industry. It looks like there’s going to be even more than that given the announcements from Time, Inc. In terms of the newsstand sales and circulation, how do you see the industry consolidation affecting the outlook for your magazines? I mean certainly the distribution costs and given the competitive landscape there it represents a challenge. Can you just give us an idea of what your thoughts are given the industry consolidation and how you can compete in that environment?

Dan Taitz

Mike, that’s an excellent question. I mean it’s not necessarily a David and Goliath scenario, and we do recognize that there have been some major consolidations in the industry which most likely will continue. And we recognize that we are a small player in the industry but our company focus is not predominantly on publishing – it’s on all the aspects of our segment, and this is almost like the cultural mouthpiece associated with the creativity to develop other ideas to exploit in other areas; that is, I’m talking about publishing specifically.

We will continue to look for other areas where we could minimize the cost structure associated with our publishing operations and we’ve done certain restructurings that we’ve talked about most recently this morning and the last quarter of focusing our efforts in publishing to improve continually towards the eventual profitability of this segment.

Michael Kupinski – Noble Financial Group

And I was just wondering, Ken, if you can just talk a little about the prospect here, if the publishing division doesn’t really come through with the revenues that you’re anticipating – it appears that Q1 we’re starting off with a little bit of a choppy start. What are your thoughts in terms of the prospect of further cost reductions going forward?

Ken West

Well, I mean we have refined the publishing operation to focus on two strong titles – Weddings is number one at newsstands in its category and Martha Stewart Living has a very significant circulation, in excess of 2 million which reflects the continued interest of a very large readership group. So we will continue to support these two publications, focus on selling the ads associated with supporting these publications. They create new ideas that lead to new merchandising categories and products, and we anticipate to the extent available we’ll continue to focus on other areas of cost that we could take out of the business. But we’re dependent upon just growing the revenues, both digitally and in print ad and moving this forward.

Michael Kupinski – Noble Financial Group

And in terms of the merchandising business, the little softness, you mentioned Home Depot but were there any other retail partners that were seeing softness in the quarter and in terms of the outlook, particularly with your pets line as well as your crafts and so forth? Can you just kind of give us an idea if there are other issues going on other than with Home Depot?

Dan Taitz

Right, although we’re not going to talk about full year estimates or any elements associated beyond Q1, there is strength in all the other partners and the only issues that we wanted to address was the Home Depot in my prepared remarks where we do see some headwinds against us in those categories that we’ve talked about over the last few quarters.

Michael Kupinski – Noble Financial Group

Okay, perfect. Alright, that’s all I had. Thank you.

Operator

At this time there are no further questions. This does conclude our conference call.

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