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

Q1 2013 Earnings Conference Call

April 30, 2013; 08:30 a.m. ET

Executives

Dan Taitz - Chief Administrative Officer & General Counsel

Ken West - Chief Financial Officer

Katherine Nash, VP Communications and Investor Relations

Analysts

David Bank - RBC Capital Markets

Juan Bejarano - Noble Financial

Operator

Good morning and welcome to the Martha Stewart Living Omnimedia, first quarter 2013 earnings conference call and webcast.

All participants will be in a listen-only mode until the question-and-answer session of the call. 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 may begin when ready.

Katherine Nash

Thank you and good morning everyone. Welcome to Martha Stewart Living Omnimedia’s first quarter 2013 earnings conference call.

Before we begin let me remind you that our discussion 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 risk and uncertainties, which are difficult to predict. Actual future results and 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 marthastewart.com.

Thank you, and now I’ll turn the call over to Dan.

Dan Taitz

Good morning. Thank you for joining us. Our first quarter results were slightly better than the outlook we provided on our last call, including better than expected adjusted EBITDA performance, owing to a couple of items that Ken will discuss when he covers the financials.

Before turning the call over to Ken, I want to update you quickly on a few items of interest. First, we are excited to report that our rollout with JC Penney is under way. In April, JC Penney’s began rolling out Martha Celebrations, our new line of disposable, stylish paper products for easy entertaining, as well as MarthaWindow, MarthaLighting, MarthaRugs and MarthaMirrors in JC Penney stores and on jcp.com. The rollout will continue through much of the second quarter.

Additionally, we have had some initial discussions with JC Penney’s new CEO, Mike Ullman and other executives. All of us greatly value our partnership and we are looking forward to working with the new team.

In conjunction with the management changes at JC Penney, we reported earlier this month that their two representatives on the MSLO Board have left JC Penney and have resigned from our board as well. JC Penney is actively identifying new designees and we anticipate they will appoint replacement representatives in the near future.

And finally two housekeeping items; I want to note that since we do no yet have a definitive outcome in the contractual dispute between MSLO and Macy’s, we will not be discussing it on today’s call. And second, as you know, we have a search process under way for a new CEO for MSLO. There are no updates to provide today, other than to say that the board continues to have discussions with highly qualified candidate.

With that, let me now hand the call over to Ken to review the quarter.

Ken West

Thank you Dan and welcome everyone to today's call. Our first quarter results were slightly improved over our forecast as Dan noted a moment ago, due largely to a few items, including the receipt of unanticipated broadcasting residuals, somewhat lower corporate expense than we had anticipated, and lower publishing expenses than anticipated, though much of this latter variance is timing related, as I’ll discuss in a few moments.

Revenue for the quarter totaled $37 million, down 25% from the prior year quarter. Of the total $12.6 million absolute dollar decline in revenue, approximately $9 million can be attributed to the restructuring actions taken in publishing and broadcasting last year. I’ll talk to these impacts in the segment discussions starting with publishing.

Publishing segment revenue declined 21% in the quarter, reflecting lower print advertising and newsstand revenue, offset somewhat by a 12% growth in digital advertising revenue. Print revenue declined by $7 million, including $3.2 million on the advertising side and $3.8 million on the circulation side.

Of this $7 million total, approximately $5.4 million stems from the restructuring actions in publishing, including the closing of our Whole Living title after the January February issue this year and the transition of Every Day Food from a print publication to a digitally focused brand and an occasional supplement to Martha Stewart Living. This $5.4 million impact on revenue was split evenly between advertising and circulation.

As I mentioned on our last call, our first quarter consolidated results included gain on the sale of the Whole Living customer list. I want to discuss this briefly since the accounting treatment of this gain differs a bit from what we anticipated on our last call.

You will see the entire $2.7 million net gain recorded as a gain on sale rather than as revenue on our P&L as originally envisioned. We are beginning to see early successes in expanding our base of advertisers MSO as our sales team makes in-roads in the marketplace.

Industry data shows that MSO's ad page performance was better than our competitive set in the first quarter and we believe this is continuing in Q2, including a significant increase in May. These results demonstrate they were making headway at executing our strategy to obtain at least our fair share of ad pages in MSO, which is a key step in driving sustainable performance in the future.

On our last call we noted that overall rates were down primarily due to selling to larger advertisers who command better rates. We are seeing higher average deal sizes and in the second quarter we anticipate seeing and up-tick in absolute ad dollars, as well as year-over-year. We also had a strong performance in ad pages at weddings in the first quarter and advertising revenue was up 6% to the best Q1 level we’ve seen in several years. We are also encouraged by weddings Q2 advertising results as well to date.

Meanwhile our investments in digital are beginning to gain traction for us. Our digital advertising revenue of $4.8 million was a record first quarter performance for this business and included a significant increase in video related ad revenue. We are continuing to ramp up efforts to produce and distribute more short form video, both on marthastewart.com and our partner network that includes YouTube, Yahoo and the AOL On Network.

By way of example, in April we launched a new original 13-webisode series with Emeril Lagasse, which was sponsored by Hidden Valley and hosted on a custom hub on marthastewart.com, as well as on YouTube and AOL On.

Overall our websites continue to generate growth in traffic. In the first quarter we had a record $6.4 million monthly unique visitors to our site, which ranks us in the top ten position among 77 food related websites. We are pleased that one third of our visitors are in the 18 to 34 demographic.

Our merchandising revenues declined about 6% to 16%, again in line with our forecast. The decline is largely attributable to factors that helped prior year results, but did not recur this year. Those factors include revenues from two smaller partnerships that have since concluded and a one-time true-up payment from our partner in the year-ago period.

We also continue to experience softness in certain categories at the Home Depot as we talked about during our last call. We are taking steps to expand our business with the Home Depot as we move forward and are optimistic about the future direction of the long-term relationship.

Broadcasting revenue comparisons for the prior year first quarter reflect the conclusion of daily live television programming in mid-2012. Additionally we recorded $700,000 in residual payments this quarter related to cable retransmission royalties associated with prior television programming.

On the expense side, our results reflect the restructuring of the publishing segment in 2012 and the elimination of nearly all fixed costs in our broadcasting business. I want to note that the improvement in publishing expense as we saw in the first quarter is a bit ahead of our schedule for the year, as a portion of the improvement relates to items deferred from the first quarter for timing reasons. As a result, we expect to see a less robust year-over-year comparison in Q2 due to these timing issues.

Merchandising expenses were significantly higher in this year's first quarter, due largely to cost related to ramping up for the JC Penney launch. Corporate expenses while modestly higher than prior year were slightly lower than the $8 million we expected and include a $1.4 million related to the litigation.

Our operating loss for the quarter was $3 million, which includes the $2.7 million net gain on the customer list sale. This gain also helps to narrow our consolidated adjusted EBITDA loss to just under $1 million for the 2013 first quarter.

The adjusted EBITDA result was better than the forecasted range of $3 million to $3.5 million and significantly improved from last year's performance. Our net loss for the quarter was $3.3 million or $0.05 per share compared with $3.6 million or $0.05 per share last year. We ended the quarter with $51 million in cash equivalents and short-term investments on our balance sheet and no debt.

I will now turn to our outlook for the second quarter. Given the significant changes across our businesses, I’ll discuss the outlook relative to the first quarter to provide a more apples-to-apples comparison.

For publishing, revenue is expected to be roughly flat for the first quarter of 2013, reflecting higher print and digital advertising revenue, offset by lower circulation revenue. Phasing in both our titles, Martha Stewart Living and Weddings is on the rise and increased revenues from our digital ad sales are beginning to take hold.

In broadcasting we continue to anticipate non-material revenues and adjusted EBITDA contributions, which is a turnaround for the first half versus the prior year.

In merchandising, given the continuing litigation, as well as the ongoing rollout of products at JC Penney in the second quarter, we are excluding from our outlook any royalty revenues from JC Penny and it is too soon to forecast them with certainty. Excluding this item, we would anticipate revenue to be up in the low teens for the first quarter.

Corporate expenses in the second quarter are expected to approximate our first quarter and again include estimates of legal fees.

Looking at consolidated adjusted EBITDA for the second quarter, we currently anticipate a loss of approximately $4 million. As a reminder, this consolidated figure does not include any JC Penney royalty contribution. The expected loss reflects a significant increase in adjusted EBITDA loss for the publishing segment, partially offset by positive adjusted EBITDA in merchandising.

Adjusted EBITDA loss in publishing will be significantly higher in the second quarter than the first quarter, due to the first quarter benefit from the gain on the Whole Living sale, increased expenses at MSO, including higher marketing costs, and increased digital expenses. We currently anticipate that our adjusted EBITDA performance in publishing will begin improving in the second half of the year.

This now concludes our prepared remarks, and now we’d like to open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Your first question comes from the line of David Bank with RBC Capital Markets.

David Bank – RBC Capital Markets

Hey. Thanks very much and good morning. Recognizing that this obviously continues to be a year of transition, I think it's – and with limited, I think visibility on some parts of the merchandising business, I was wondering if I could get a better sense for publishing and for the broadcast business, where you expect to kind of exit the year on a fixed cost run rate and for those two businesses, and what you think will drive and how qualitatively the variable cost will be driven if that's possible.

Ken West

Good morning David. This is Ken. Let's take broadcast first and then move into publishing. For the broadcast basis, although we're not giving outlook for the balance of the year other than the second quarter that I mentioned in my prepared remarks, we're not expecting significant costs or revenues in the broadcast segment overall. So that's consistent with what we’ve spoken about for the second quarter.

And for publishing, it's been a focus of us to try to address the cost structure and as you remember what we did at the end of 2012, is to takeout a lot of the costs associated with running two specific titles that were not performing economically for us. So we'll have the benefit that we've talked about in prior earnings calls, the benefit of reducing costs for the balance of 2013.

David Bank – RBC Capital Markets

So I understand that, but is it as simple as taking that number, last year's number less the savings number or can you give us a sense of – I know it's a tough question, but basically what the new publishing businesses fixed cost base would look like. I guess that's kind of what I'm looking for, as you enter into 2014 or maybe you're just not ready to talk about that yet, so can't blame me for trying.

Ken West

I appreciate your effort, but let's defer this to be addressed in next quarter's call, when we have a better outlook for the company as a whole.

David Bank – RBC Capital Markets

Okay, thank you very much.

Ken West

Sure.

Operator

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

Juan Bejarano - Noble Financial

Hi, good morning. This is Juan Bejarano in for Michael Kupinski and thank you for taking my questions. If you could and sorry I may have missed it, can you provide us an update on the relationship with Home Depot? I know that Home Depot has scaled back some of the products in the outdoor furniture category.

Dan Taitz

Good morning Juan. This is Dan. We have experienced as we’ve mentioned on previous calls softness in a couple of categories like flooring. We are planning this year for a reduced order size as you said in patio category. We have been working very diligently with the Home Depot. The results for this quarter are a little disappointing to us. We are optimistic that we can turn it around and we're heartened by the Home Depot's working with us very productively and we're optimistic about the future.

Juan Bejarano - Noble Financial

Okay, and given that the company hired an international merchandising head last year, what is the progress on an international distribution agreement? Anything there that you can update us on?

Dan Taitz

We have nothing to announce at this time. We are working actively in a couple of fronts with both potential sourcing partners and potential international partners, but it’s a challenging area for us. It's a new business opportunity that we absolutely believe in, but we don't have anything further to announce at this time.

Juan Bejarano - Noble Financial

And then turning to publishing and given the current trends, can that division achieve positive EBITDA or should we assume that further cost cuttings will be made in the balance of the year.

Dan Taitz

Well, Ken gave you some indication on this. We are not ready to give long term guidance beyond next quarter, but I think it's fair to say that in order to achieve profitability in addition to looking for cost cutting opportunities, we need to increase revenue and we are pleased that so far we are seeing revenue increases, particularly in digital, which we think is a big opportunity for the future and where we're putting some, as Ken mentioned earlier, where we're making some additional investments that we think will pay off.

Juan Bejarano - Noble Financial

Okay, thank you. And then just two more questions if I may. I believe that the company was trying to sublet some of office space at its headquarters. Any updates on that prospect?

Dan Taitz

It is and element of consideration and we'll update the group, the investors in the next quarter's call with conclusion for sure.

Juan Bejarano - Noble Financial

Okay, perfect. And given your large cash position and virtually no debt, what are the company's thoughts on buying back stock given the depressed levels?

Dan Taitz

The board has discussed this topic. However, there's no conclusion made at this time, but to the extent when a conclusion is made to return capital to investors in that manner, we will certainly make an announcement.

Juan Bejarano - Noble Financial

Okay, thank you. That's it for me. Thank you.

Dan Taitz

Thanks Juan.

Operator

At this time there are no further questions. This concludes today's conference call. You may now disconnect.

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