Dow Jones & Company Inc Q2 2006 Earnings Conference Call Transcript (DJ)

Dow Jones & Company Inc (DJ)
Q2 2006 Earnings Conference Call
July 20, 2006, 10:00 am ET

Executives

Rich Zannino - CEO
Chris Vieth - CFO
Gordon Crovitz - President, Consumer Media and Publisher of the Wall Street Journal
Mark Donahue - IR

Analysts

Peter Appert - Goldman Sachs
John Janedis - Wachovia Securities
Lauren Fine - Merrill Lynch
Debra Schwartz - Credit Suisse
Craig Huber - Lehman Brothers
Brian Shipman - UBS
Fred Searby – JP Morgan
Lisa Monaco - Morgan Stanley
Paul Ginocchio - Deutsche Bank

Presentation

Operator

Greetings, ladies and gentlemen, and welcome to the Dow Jones & Company. second quarter of 2006 earnings conference call. (Operator Instructions) It is now my pleasure to introduce your host, Mr. Mark Donahue, Director of Investor Relations for Dow Jones & Company. Thank you, Mr. Donahue. You may begin.

Mark Donahue

Thank you. Good morning and welcome to our second quarter of 2006 earnings conference call and webcast at www.DowJones.com. On this morning's call we have with us Rich Zannino, our Chief Executive Officer; Chris Vieth, our Chief Financial Officer; Gordon Crovitz, President of Consumer Media and the Publisher of the Wall Street Journal; and John Wilcox, President of Community Media Group. All will be available to take any questions you may have.

The transcript of today's prepared remarks will be on our website shortly after the call. Also this call will be available by replay from 12:00 pm today until 11:59 pm on July 27 by dialing 877-660-6853 and entering account number 286 and confirmation number 205431. Finally, if you have any questions after the call, please feel free to telephone Investor Relations at 609-520-5660.

Our discussion today will include certain forward-looking statements, and actual results may differ from those presented here. Factors that could cause such a difference are outlined in our SEC filings and on our website. Reconciliation of non-GAAP financial measures disclosed today are available in our earnings release, which is available in the Investor Relations page of our website at www.DowJones.com.

With that, it is a pleasure to turn our call over to Rich Zannino.

Rich Zannino

Thanks, Mark. Good morning, all, and thanks for joining us. I will start off this morning by disclosing our significantly improved short-term results and the progress we are making in our efforts to retool our portfolio and business model to drive long-term growth in our earnings and share price. Chris will follow with some additional color on our financial results, give details on our continued cost-cutting moves and review our third quarter outlook. Then we will open it up for questions.

We have put up another solid performance in the second quarter. Revenue was up 6% as we posted gains in all three of our business segments. EPS before special items was up 15% to $0.39 per share as we posted double-digit percentage gains and profits and significantly improved margins in both our consumer media and enterprise media segments. This builds on the momentum from the first quarter, and for the first six months of 2006, our revenue was up 8% and our EPS before special items was up 18%.

This industry-leading performance is especially gratifying as it comes in spite of the planned dilution from our rollout of Weekend Edition. In fact, excluding Weekend, revenue would have been up about 5% and EPS before special items would have been up about 34%. This performance proves the operating leverage we have in our business.

We believe this outlying performance is being driven by the many innovative investments, initiatives and organizational changes we have made to revamp our portfolio, modernize our business practices, drive revenue and reduce costs. These are all enabling us to better leverage our indispensable content and trusted brands to grow revenue and profit in this new media world where revolutionary advances in technology have spawned an exponential increase in the number of choices and competitors for today's readers and advertisers.

We continued successfully to execute on our initiatives in the second quarter. For example, the Journal's Weekend Edition continues to please readers, attract more and more advertisers and drive growth in consumer advertising. When we include the advertising we are getting Monday through Friday as a result of Weekend Edition, we are tracking our original financial projection.

Weekend Edition is also a vital element in another of our major initiatives: the revitalization of our print advertising sales efforts. The success of these revitalized efforts is evidenced by our industry-leading ad revenue gains and the significant share we are taking from the bulk of our print competitors.

Another of our initiatives, improving our print circulation economics, is also working very well. Journal print circulation revenue and profitability has been growing in each of the past five quarters, driven by rate increases and an increase in the number of truly paying subscribers. This increase in paying customers in turn has spurred an 8% increase in print journal readership as measured by MRI in the spring of 2006. So, as you can see, we are bucking print industry trends and sales circulation and readership.

We are also on track with another major project, Journal 3.0, the redesign and reformatting of the print Journal into a narrow web width. This will make the print Journal even more relevant and dispensable and convenient for readers and save us about $18 million per year in newsprint and other production costs when it launches in January of 2007.

In our repositioning of the Journal's international print and online additions, we are exceeding our bottom line expectations in 2006.

Moving out of print into our digital operations at Dow Jones Online, we are also exceeding our profit expectations in 2006, driven by a 33% increase in circulation revenue and a 23% increase in ad revenue in the second quarter on strong performance at both the Online Journal and MarketWatch.

At Ottaway, a $170 million investment in the Stockton Record and its new press is tracking ahead of profit expectations as well in 2006, as is our Ottaway-wide Internet initiative which has driven a 44% increase in online ad revenue so far this year.

Finally, the reorganization of our structure and top came into customer-focused rather than channel-focused business segments undertaken in February is saving the anticipated $15 million per year, while at the same time delivering the intended benefits of improved market focus, integration of print and online to better monetize our brands and customers by inducing them to use all distribution channels and streamlining our decision-making and execution.

It is not just these big initiatives that are helping to grow earnings and profits. We have many smaller ones underway as well. We are expanding an online video both with content and with advertising. We are licensing and delivering our content to cell phones and PDAs. We are expanding to digital outdoor media. We are improving our websites and licensing operations with technologically advanced Ajax-enabled live quotes, live news and live features.

We are constantly adding new options for advertisers to reach our audience from section front ads in the print Journal to interest-based targeting online to significant multiplatform advertising deals across print, online and all of our Dow Jones properties.

We have also launched innovative new products at Newswire. All these initiatives represent large seven and eight figure revenue and profit opportunities.

We have put more initiatives to work in the second quarter. We successfully tested inserting pre-printed advertisements in the Journal in our Weekend Edition. We announced two days ago that we will be adding a high-priced ad to the front page of the print Journal. This is worth double-digit millions of dollars in profit on an annual basis.

We also announced last week the formation of a new strategy task force comprised of Gordon, Clare Hart, me and the senior-most editors of all of our products. We will be led by Paul Ingrassia, a Pulitzer Prize winner and the recent President of our Dow Jones Newswires.

Our content is our greatest competitive advantage, and the primary goal of this task force is to develop and execute initiatives to make our content even more differentiated and dispensable and conveniently accessible so we can better serve our readers and users and also to improve the efficiency and productivity of all of our news gathering efforts.

Finally, during the second quarter, on the cost front we announced the outsourcing of a number of back office functions. This will reduce our back office and IT costs by about $15 million or $0.11 per share annually starting in 2007. Chris will have more on this in his remarks. We expect to continue the steady pace of innovation and transformational change in coming quarters, but moving on now to our second quarter operating results.

At our Consumer Media Group, revenue increased 9%, operating profit increased 47%, and margins increased 170 basis points to 6.7%. The operating gain in the quarter would have been significantly higher if not for the expected dilution on the rollout of Weekend Edition.

We have said in the past that $0.80 of incremental ad dollar flows through to the bottom line. Some doubted us on this topic in the first quarter, but we proved it in the second quarter with a flow through of Consumer Media Group, excluding dilution from Weekend Edition and the 11% increase in newsprint prices was over 90%. Year-to-date it was 72%. It will dip in the seasonally soft third quarter but rebound in seasonally heavy fourth, and we believe it will exceed 80% flow through for the full year.

CMG ad revenue in the second quarter was up 10%, driven by 12% growth of the domestic print Journal and 23% growth at Dow Jones Online. Circulation revenue was up 6%, driven by the fifth consecutive quarter of circulation revenue gains of the print Journal and 33% growth in circulation revenue at Dow Jones Online.

Looking closer at advertising performance at the print Journal, second quarter ad linage was up about 11%, marking the fourth consecutive quarter of linage gains. We have been gaining meaningful market share in our primary print market in both B2B and consumer ad categories in this very challenging print ad environment.

This performance is bring driven by the numerous changes to our sales efforts over the past couple of years, combined with the Journal's uniquely attractive audience. We have implemented a new category focused sales organization and approach, more innovative marketing, more flexible pricing programs, new advertising positions and market-leading collaboration between our print and online sales teams.

But one of the biggest drivers of our performance has been the introduction and rollout of Weekend Edition in September of last year. Reader reaction continues to be overwhelmingly positive, and it is no surprise that advertisers are being attracted to Weekend Edition in increasing numbers. More than 950 advertisers have supported Weekend Edition since its launch less than a year ago. With about 60% of them new to the Journal, it is having a great effect on the growth of our consumer advertising.

Not only is consumer making up 70% of the advertising in Weekend Edition, but also the additional sales reps, promotions, marketing, PR and focus we have layered on as part of the rollout of Weekend is generating significant incremental revenue for us as we said it would in the Monday through Friday editions of the Journal.

We conservatively estimate this is to be worth about $0.02 per share in the second quarter and $0.04 per share year-to-date. Including this benefit, dilution from Weekend Edition in the second quarter amounted to about $0.05 per share and is running at $0.10 per share through the first six months of 2006.

We have a number of sales initiatives in the works to drive second-half Weekend sales, including special sections, editorials, new advertising positions, new content adjacencies, joint print online proposals and new programs to target specific categories of advertisers.

As a result, we expect Weekend to be $0.03 dilutive in the third quarter and for it to be about breakeven in the consumer advertising heavy fourth quarter. This includes about $0.02 per quarter for the Monday through Friday sales benefit of Weekend Edition.

Looking further at second quarter advertising results of the print Journal, we saw healthy broad-based revenue gains across most major ad categories and subcategories.

In our financial category, we continue to see positive trends with linage at the Journal up 9.6% in the second quarter, driven by strong tombstone, insurance and retail linage, partly offset partly offset by a decline in wholesale linage. We expect this positive trend to continue in financial advertising into the third quarter.

Technology linage was up 6.9% in the second quarter. Strong gains in communications, hardware and office product advertising were partially offset by declines in personal computer and technology professional services ads. We're expecting this trend to put back to negative territory in the third quarter in technology with gains in telecom offset by declines in other technology categories.

In the Journal's general advertising category, which includes both B2B and consumer advertising, linage was up 9.5% in the quarter. We posted a 25% increase in general B2B advertising due to increased corporate, aviation, professional services and real estate advertising. Our current outlook showed strength in general B2B advertising to continue into the third quarter of 2006.

The Journal's consumer ad linage was up about 5% in the second quarter. Our newly organized consumer category team is driving double-digit gains in travel, luxury goods, pharma, health care and other consumer advertising. Unfortunately these gains were partially offset by a sharp decline in foreign auto advertising in the second quarter. We expect this team to post double-digit gains again in these consumer categories in the third quarter with a slight decline in auto advertising with total consumer advertising to be up double-digits in the third quarter.

Classified linage was up 17.4% in the second quarter, driven by continued strong increases in real estate and other classified advertising. Color ad pages were up 23% in the quarter, which helped drive close to a 1% increase in an average ad rates at the Journal, even with the heavier mix of the lower yielding classified linage.

At Dow Jones Online, which includes the Online Journal, its vertical website, Barron's Online and MarketWatch, total revenue grew 21%. Ad revenue was up 23% on strong growth at both MarketWatch and the Online Journal. Circulation revenue was up 33% as a result of last year's price increase and 3% growth in paid subscriptions in the Online Journal, which grew to 755,000, as well as the separation of Barron's Online into a separately paid site in January of this year.

At Barron's Online we have added 68,000 paid subscribers since January of this year when we set it up as a separate site. This has generated over $1 million in annual subscription revenue with the majority of it falling through to the bottom line.

Elsewhere in Consumer Media, the repositioning of the Journal editions in Europe and Asia continued to generate better-than-expected bottom line results in spite of the decline in second quarter ad revenue of about 6.4%. This weakness at the Asian Journal more than offset gains at the European Journal.

At Barron's, ad revenue decreased 6% in the quarter due to declines in financial, auto and technology advertising.

To close out our Consumer Media Group discussion, while we're pleased with the second quarter revenue and profit gains and flow through, we will continue to identify and implement more revenue and expense initiatives to restore respectable profitability in margins in this critically important segment.

Moving onto Enterprise Media, the positive revenue and profit momentum we saw in the first quarter of this year continued into the second quarter. Total revenue increased 1.8%, operating income was up 13% and operating margins increased 260 basis points to 26.8%. These gains were driven by growth at both Newswires and Indexes and Ventures, and tight expense control across Enterprise Media Group, where expenses were down 1.7% in the quarter.

Newswires' revenue was up 4% in the quarter on gains in international and domestic operations due to new pricing plans and strategies pursued earlier this year. Three new product innovations: Total Coverage, Wealth Management 2.0 and a new enterprise-wide licensing pricing program will help drive future growth there.

Our Indexes and Ventures business posted a modest 2% revenue gain in the second quarter. After several years of double-digit growth in revenue and profit, our Indexes business slowed in the quarter, mainly due to the discontinuation of a contract for a major client due to the loss of exclusive access to our Diamond ETS option, which resulted from an adverse intellectual property ruling. We also saw slightly reduced fees from another large client and a reduction in assets underlying our Diamond ETS.

Rounding out the Enterprise Media Group, Dow Jones' licensing services revenue declined 9%, though several annual contracts were not renewed due to client consolidation along with increased competition which is depressing pricing. We've recently ramped up development spending, and we expect to see a revenue improvement beginning in 2007.

Our Community Media Group second quarter performance continues to reflect industry-wide challenges. Second quarter revenue was up 1.7% on a 2.3% increase in ad revenue. Linage declined 5.5% as increases in real estate classifieds and display advertising were more than offset by declines in auto and help wanted classifieds. This linage decline, though, was more than offset by higher preprint revenue and a 44% increase in Internet ad revenue as our Internet initiative continues to drive gains.

Operating expenses increased 3.8% with the majority of this increase due to higher pension expenses due to changed actuarial assumptions and increased depreciation. As a result, operating income declined 4.5%, and margins declined 150 basis points to 23.5%.

Before turning it over to Chris, let me say that our financial results for the first half of the year reflects strong returns on the numerous initiatives we put into place. We will continue this momentum with the initiatives developed in the second quarter, and the development of our new long-range plan, we will be adding even more bold initiatives.

All of this gives us confidence in our future and in our ability to achieve our vision of being the world's best provider of high-quality indispensable and conveniently accessible business and related content wherever and whenever and however our customers want it consistently generating superior value to all our customers, shareholders and employees.

With that, I will turn it over to Chris.

Chris Vieth

Good morning, everyone. This morning I will provide some additional background on our second quarter financial results and close with our outlook for the third quarter. We have been innovating to succeed in this rapidly changing business media landscape, and as Rich outlined earlier, these initiatives are providing the fuel for investment and earnings growth as we move to transform our portfolio for the future.

Starting off with revenue, we posted a total increase of 6% during the second quarter led by an 8% increase in ad revenue with double-digit growth at both the U.S. Journal and at Dow Jones Online.

Information services revenue was up 2% led by gains at Dow Jones Newswires, and circulation and other revenues were up 4% due to our price increases and a higher number of paying print subscribers at the U.S. Journal and at WSJ.com and Barron's Online.

Second quarter total operating expenses before special items were up 4.6% to $423 million. Weekend Edition spending accounted for roughly 3.5% of the increase over last year with 1% for newsprint, web width and stock option expenses, leaving all other expenses flat to last year. This is considerably better than our guidance as we reduced expenses up and down the P&L, led by lower print delivery costs, reduced professional technology and other administrative expenses and lower circulation marketing and new product spending for initiatives that shifted here into the third quarter.

We also benefited from reduced depreciation and lower capital spending, as well as the ongoing benefits of headcount reductions and other cost controls across the Company. As a result of this expense control, we leveraged the 6% increase in revenue into a 17% increase in operating income to $59 million, and total Company operating margin increased 110 basis points to 12.2% from 11.1% last year.

Below the operating line, pre-tax equity income was $3.5 million versus $1.8 million last year, driven by the elimination of international television losses, as well as improvements at stocks, which more than offset a loss in the second quarter of 2006 related to the planned divestiture of a small joint venture.

Net interest expense increased $3.7 million in the second quarter due to the increased debt levels as part of the $202 million settlement with Cantor and NBC and about a 200 basis point increase in commercial paper rates over last year.

Before special items, our effective tax rate was 38.4% in the quarter versus last year's rate of 40.3%, and included the benefit of a small state tax refund. Rolling all of this together, we delivered reported EPS of $0.34 versus $0.01 last year.

In the second quarter of 2006, we recorded two special items, netting to a pre-tax loss of 6.8 million or $0.05 per share. The first item was a gain of $3.1 million on the $5 million sale of a surplus Ottaway building and property. The second was a charge of $9.9 million for restructuring associated with our major outsourcing initiatives in information technology, customer service and accounting, along with some staff reductions at Ottaway and at other business units. Before these special items, we delivered a 15% increase in EPS to $0.39 per share versus $0.35 per share last year.

As we have said in the past, we are committed to hanging onto the hard-won costs reductions we have implemented over the past five years, and we are looking for more. The $9.9 million restructuring charge taken in the second quarter of 2006 covered the elimination of approximately 250 full-time employees, and transitioning of the operations are expected to be largely complete by the end of 2006. These initiatives would deliver savings of roughly $15 million annually beginning in 2007.

We are also aggressively pursuing new initiatives in our administrative and technology departments and at Ottaway. We have identified actions that we're now executing against that will save another $9 million beginning in 2007.

Some examples of these initiatives include things like: reengineering our market data acquisition and utilization across business units; replacing small office leases with a virtual office model for certain functions; further driving down technology fixed costs such as maintenance and telecommunications; reengineering Ottaway advertising, billing, collections and support functions; replacing Company leased vehicles for field sales staff with competitive mileage reimbursement plans and many others.

Adding in the previously announced $14.5 million we saved in the first quarter restructuring and the $18 million of savings we will realize next year on our Journal 3.0 web width reduction brings the total annualized cost savings to $56.5 million before one-time costs. We will realize roughly $10.5 million of that here in 2006 and $46 million or about $0.33 per share in 2007.

Looking at some other key figures, total newsprint costs in the quarter were up roughly 15% with consumption up about 3% and average cost per ton up about 11%. As expected, the announced $40 price increase in February settled in at $25 per ton in the latter half of the second quarter.

Recently another $40 price increase was announced effective for August 1 as newsprint producers face continued increases in fuel and fiber costs. However, with industry consumption declining, we believe we won't see much impact in this price increase this year if at all.

Depreciation and amortization totaled $25 million for the quarter, and we have about $1 million from the prior year period as a result of our overall lower capital expenditures over the last several years. Our second quarter headcount totaled about 7,300 and was down about 1% as a result of our restructurings.

Capital expenditures totaled $19 million in the quarter compared to 13 million last year, and the increase is primarily related to $7 million in spending for the Journal 3.0 project.

Lastly, we closed the quarter with a cash balance of $20 million and reduced debt levels by $40 million in the quarter, closing with a balance of $674 million versus $714 million at the end of last quarter.

Looking forward, let me first remind you that the third quarter is historically our lightest of the year for advertising revenue as the July and August summer months are slow with about half of the U.S. Journal's ad revenue occurring in September.

While this makes forecasting a bit more difficult, we are nonetheless seeing a solid base of new business in our reservations, and we are estimating that Journal advertising linage will increase in the mid to upper single digits percentage range.

We expect to post gains across our financial, general B2B and consumer categories, along with continued strong classified real estate advertising that together will deliver ad revenue gains up slightly more than linage.

Adding in continued double-digit growth at Dow Jones Online and low single-digit growth at Enterprise Media and Community Media, this implies a mid to upper single-digit percentage increase in total revenue in the third quarter of 2006.

Total operating expenses will be up about 6%. This includes roughly 2.5% for planned expenses for Weekend Edition and about 1% for web width expenses and stock option expensing, leaving remaining costs up only 2.5% over last year. A slight decline in equity earnings, increased interest costs due to a higher debt level and higher interest rates and a 39.5% tax rate results in third quarter 2006 EPS before special items in the low teen cent per share range before special items versus $0.12 per share last year.

With that, we will open it up and take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Peter Appert, Goldman Sachs.

Peter Appert - Goldman Sachs

Rich or Chris, you gave very comprehensive guidance here for the third quarter. Yet in the context of what seems to be some pretty good momentum on the revenue side and obviously very great success on the cost side, the guidance just feels light. What am I missing here?

Rich Zannino

I think that we give guidance to try to give some parameters to people in building the model and looking at the underlying tone and trends of our business. Clearly we have come out of the first and second quarter with a very strong trend of business at the Journal. In print revenue we were up 18% in the first quarter and up 12% in the second quarter. As Chris noted, we're projecting the third quarter to be up mid to upper single digits.

The third quarter is always difficult to project because July and August are very soft months. More than 50% of the quarter happens in September, and you don't get a lot of visibility to September because most people are on vacation in July and August. So it is the toughest quarter of the year for us to project. But when we look at our ad reservations and we project them out, we are comfortable giving guidance in the mid to upper single digits range.

I would also say there is a fair amount more economic uncertainty today than there was certainly in the first half of the year. You know, uncertainty around slowing GDP, inflation, housing, interest rates, ensuing Fed moves, et cetera. So I think that is introducing some uncertainty into the system.

Likewise, the troubles in the Middle East here over the last couple of weeks are likewise introducing some uncertainty, and all that affects corporate and business cost. That is probably the biggest driver of Journal advertising revenue. So we factored some of that into our thinking.

When we look at it a little bit more specifically, we see that tech spending is softening a little bit in the third quarter. It was up in the first quarter; it was up in the second quarter; we're projecting it to be down in the third quarter.

Then we also are projecting classifieds real estate linage to finally fall back to single-digits in the third quarter here as the real estate market slows a little bit. We are projecting big increases in consumer advertising in the third quarter, but that won't be enough to get us back to the first-half trend.

Having said all that, mid to upper single-digit increase in print advertising in this environment would certainly indicate we would be continuing to take share in the third quarter. So we feel good about that.

The last thing I will say on the topic is, we are obviously working as hard as we can to drive as much revenue as we can and the ad sales revitalization continues. We continue to see the momentum in the new consumer organization, and under Judy’s leadership, the ad sales team is really doing a terrific job.

The addition of the front page ads won't hurt. Those launch in September, so we will get a little bit of a benefit of those in the third quarter, but we will see more of the benefit of those ads in the fourth quarter. So I hope that was responsive.

Peter Appert - Goldman Sachs

That was excellent. Thank you. Could you guys give us any rough idea of what the revenue contribution of the Saturday Journal was for the quarter and what you think it might be for the year?

Rich Zannino

I think you'll actually be able to find that up on the IR website because it is up as a supporting schedule.

Peter Appert - Goldman Sachs

Is it? Okay, very good. Thanks a lot.

Operator

Our next question comes from John Janedis, Wachovia Securities.

John Janedis - Wachovia Securities

Two questions if I could. First, can you talk more about your online revenues in MarketWatch? I think in the past you had mentioned that revenues there performed below your initial expectations when you bought the asset, but you were fixing the problems there related to some people leaving.

Where are you on that? How do you think you performed relative to the industry and other finance verticals during the quarter? Then I have a follow up. Thanks.

Gordon Crovitz

We're very pleased with the 23% increase across Dow Jones Online. We don't break out how the different lines did: Online Journal, MarketWatch and Barron's. Our sense is that MarketWatch actually grew faster in this quarter than the Online Journal, just to give you a little bit of comparative color.

I think that kind of growth for the display part of online advertising puts us pretty much in the pack in terms of increases in online advertising, and this is despite the fact that MarketWatch in particular is quite reliant on online brokerage sites. As you know, there has been a tremendous amount of consolidation in that area that accounts for about one-quarter of MarketWatch's advertising.

Rich Zannino

After what Gordon said, while we're right there in terms of ad revenue growth for the quarter, we did have 33% growth in circulation revenue, which is a category of revenue most other Internet players don't have. Keep that in mind as you look at our performance.

Chris Vieth

Just to add a little bit of color to that point, because it is one that only we can talk about because of our model, we had a 12% increase in number of subscribers when you compared the Online Journal and Barron's Online, which is the fairest way to do it because that is comparing apples-to-apples because, as you know, Barron's separated in January.

John Janedis - Wachovia Securities

Okay. Just to Peter's question on the Weekend Journal, can you guys talk about pricing there? I think in the past it seems like they were coming in at a discount to the Weekend on a per page basis. If that is true, will that compress, and is there timeframe we should expect?

Rich Zannino

We have all kinds of programs to drive volume in Weekend Edition, and there are frequency programs to drive volume, and that is a form of discounting. It is all on the rate card. So it is all very transparent in terms of what we're doing.

We're building and growing that business, and we are focused on dollars of revenue, not necessarily rates at Weekend at this time. So, as long as we can continue to drive significant incremental revenue with those programs, I think we will continue those programs.

John Janedis - Wachovia Securities

Okay, Rich. On top of that, I think last quarter you said you were just slightly behind in terms of budgeting on the Weekend. My sense now from your comments is that you have caught up. Is that fair to say?

Rich Zannino

It is fair to say that we are adjusting our methodology in how we are calculating dilution. We have said all along that we would expect Weekend Edition to provide some flow back and positive advertising in Monday to Friday.

Now that we have about nine months under our belt with Weekend, we have gone in, and we have done some analysis to calculate what the benefit to Monday to Friday advertising is from the launch and rollout of Weekend Edition.

It may add about $0.02 a quarter in the first and second quarter, and it looks like it will run about $0.02 a quarter in the third and fourth quarter. So we are crediting Weekend Edition as we should with the incremental revenue that it is driving for us in Monday to Friday. On that basis, we're tracking right in line with our original expectations for the year.

John, I would just say in the same way that when we look at the advertising that runs on Saturday in Weekend Edition, for purposes of calculating dilution, we exclude the advertising that moves from Monday to Friday to Saturday.

We believe that it is only fair that we also credit to Weekend Edition the advertising that runs in Monday to Friday that we would not have had had we not launched Weekend. If you go back into my script, you will see we have given full disclosure on what the numbers were; you can guess at what the numbers are with and without that adjustment.

Chris Vieth

Maybe just while we are on this topic to add a little bit of color, we have dedicated Weekend Edition salespeople, and I will give you some examples where we have had to give accounts that never ran in the Journal that are running in the Journal now Monday to Friday because of efforts by the Weekend Edition team people.

[Inaudible] chose to include Monday to Friday in their campaign, and that includes advertisers like Kiwi Shoe Polish and the Canadian Tourism Convention and [Bruno Ricard] and [Barry Topsiders]. The kinds of advertisers who when they just by seeing those names, you would see would be the kind that would be on a Weekend Edition sales target list. We're delighted, of course, to have them in the paper Monday to Friday or Saturday.

John Janedis - Wachovia Securities

Thanks a lot.

Operator

Our next question comes from Lauren Fine with Merrill Lynch.

Lauren Fine - Merrill Lynch

Great, thank you. Actually just sticking with the Weekend Edition, were there any new advertisers that you were able to capture in the second quarter? Then I have some follow-up questions.

Rich Zannino

I will run down a list to give you a flavor of advertisers who were new to the Journal through Weekend Edition. It includes advertisers like the India Ministry of Tourism, Disney, California Closets, Nivea for Men -- I didn’t know there was such a thing -- Electronics, Crutchfield, Macy's and Schaeffer Pens.

So those are examples of new advertisers going on through Weekend Edition. Just to make a more general point, which I think is understood, we have known all along that readers of the Wall Street Journal are the biggest consumers of almost every category one can imagine, including women's fashion.

You don't think of the Wall Street Journal as necessarily a place that will sell a lot of women's fashion, but the readers of Wall Street Journal buy more women's fashion than readers of all the women's fashion magazines combined. So Weekend Edition like Weekend Journal, like Personal Journal, and in particular Pursuits of Weekend Edition is providing an editorial environment for consumer advertisers to try to reach our audience.

Lauren Fine - Merrill Lynch

I think you just said that Wall Street women are not fashionable, but I will ignore that.

Rich Zannino

That wasn’t what I meant to imply, Lauren. Forgive me. Our readers can buy all those Chanel suits.

Gordon Crovitz

Take it from where it comes, Lauren.

Lauren Fine - Merrill Lynch

Can I ask you some questions about the decision to sell ads on the front page? I am wondering what you expect the pricing to look like, and if similar to Weekend Edition, while it will be at a premium, will there be some type of programs to encourage people to try it? Any sense of what you expect in terms of sell out rates? Any shift from other sections? If you expect to get new advertisers that might not have been in the paper before? Any color that you can give us will be great.

Gordon Crovitz

Thank you. Let me just start by giving a little bit of context. We did announce this week that we launched a front page in the U.S. edition of the Journal in the third quarter. That will be available all six days. We are calling it a jewel box. It will be square in shape in the bottom right hand of the front page.

As I have said and I think you all will agree, the front page of the Journal will provide the greatest opportunity available anywhere in any medium for advertisers to reach a large affluent, influential audience.

This really is part of our thinking about what it is to be a media company in the digital age. What is it the print can do uniquely and powerfully for advertisers?

I think display advertising, especially to our audience, is obviously something that print can do. As we optimize the Journal franchise across print and online, page one ads in the U.S. Journal are just the latest example of our thinking about how best to do that.

In terms of more specifics, we do think that these ads are going to command premium pricing. There was some media speculation about what that range might be, and we have not confirmed it, though I would say it is not too far off. If we can sell these ads everyday, as Rich said, we will deliver double-digit millions in annual revenues.

To address part of your question, this ad obviously will become part of the core offering of the Wall Street Journal. It is not going to be perfectly straightforward how to measure this on an incremental basis, but even so we think that looking at it on an incremental basis, the increase in annual revenues and operating income will be in the double-digit range.

Lauren Fine - Merrill Lynch

A final question if I could. What was the reason behind the recent change in sales leadership for online?

Gordon Crovitz

Randy Kilgore who had been the head of the online Group left for personal reasons. These things happen. Randy was a good colleague for many, many years. We have tremendously strong leadership. Brian Quinn has succeeded him. We have made some other promotions. We feel we have the strongest online sales team and most experienced online sales team; but of course, personnel shifts do occasionally occur.

Lauren Fine - Merrill Lynch

Thank you very much.

Operator

Our next question comes from Debra Schwartz with Credit Suisse.

Debra Schwartz - Credit Suisse

I have two questions. First, I was wondering could you just give us some more color on why you expect tech to turn in Q3, and is that a trend you see continuing into Q4?

Secondly, just on the web width reductions. Chris, I think you said it would contribute about a 1% to expense growth in Q3. Can you just tell us how much expense we should expect to see in Q4 for that?

Chris Vieth

Yes, it's about $0.02 in the third quarter, and it will be about $0.04 in the fourth quarter, Debra.

Rich Zannino

Just a little bit more color on outlook for technology. We do see some strength in semiconductors. We are very pleased with the strength in the new MarketWatch, front page unit which tends to be purchased by tech companies.

Our issue is we are going to have prior year comparisons with a period that included several major product launches. These campaigns are continuing with the newspaper, but at lower volumes.

I might also just point out that communications looks like it could continue to grow with double-digit linage. So this is really a reflection of some comps from the previous year around very specific campaigns.

Gordon Crovitz

I would just note because we have talked about it before, while we have not given expense guidance for Q4, the savings initiatives we had in the first quarter this year will offset that in the fourth quarter. So it will be about a push between those two things.

Debra Schwartz - Credit Suisse

Great, thank you.

Operator

Our next question comes from Craig Huber with Lehman Brothers.

Craig Huber - Lehman Brothers

Good morning. Rich, can you just update us if you would since you have been CEO of the Company, how many top managers have you replaced in the Company? What percentage is that of your top management?

Rich Zannino

I think one way to look at it is of the top 25 business leaders in the Company, 15 of those roles were changed, either in movement in the job -- I would say that 60% of our top 25 jobs have new and energized leadership in them.

If you look at our top 50, it is 30 of our top 50. So again, about 60%. So there has been quite a bit of change and movement in the job. I haven’t gone back and added up how many people are no longer with us in those groups. I think in the top 25, it is seven or eight; in the top 50, it is probably 11 or 12.

Craig Huber - Lehman Brothers

Dilution for the Weekend Edition, in the past you acknowledged you have talked about roughly $0.15 to $0.17 of dilution for Weekend. It I my understanding in the past you were not including $0.02 a share for benefit Monday to Friday, so corrective sales initiative held back in Monday to Friday.

So really is it just an extra $0.08 here? Are you really trying to say that your dilution compared with your original dilution expectations is significantly higher now, roughly $0.08 higher than for the year?

Rich Zannino

Not $0.08. It is less than that, but it is higher on the original basis. It will depend on what happened in the fourth quarter, of course. We are expecting a pretty big fourth quarter for Weekend Edition because it is so consumer heavy around holiday and what not.

So, on the original basis, the dilution will be somewhat higher than our original expectations. But on the revised basis, which again I believe is the right way to look at it, it just took us awhile to do that to have enough experience under our belt to do the analysis. On the revised basis, it will be less than our original expectations.

Craig Huber - Lehman Brothers

Then a final question. Originally when you announced the Weekend Edition, you talked about I think roughly $150 million of incremental cost associated with that. Can you just update us? I realize it is lower, but where is that annualized cost figure at nowadays?

Rich Zannino

That is a disconnect. We never were anywhere near $150 million. I think The Street and the model had anywhere from $60 million to $80 million of expense, and that is where we said that is the range.

So we are tracking right about there. We have hired additional sales and marketing people, about 19 in total, and we have hired roughly 90 or so news people. We have hired 20 or 30 additional people in the production facilities, the printing presses. We spent some incremental marketing against it. We will spend more here in the back half against it as we ramp up for fourth quarter with all these other initiatives.

But the biggest cost, as you know, comes from printing and delivering 1.7 million- copies every Saturday. That is $0.30, $0.40, $0.50 a copy depending on the size of the paper. So that is the lion's share of the cost.

Craig Huber - Lehman Brothers

I'm sorry about that. I think the 150 was the original number of people you were going to hire?

Rich Zannino

Yes, that is probably right.

Craig Huber - Lehman Brothers

Thanks a lot.

Operator

Our next question comes from Brian Shipman with UBS.

Brian Shipman - UBS

Thanks, good morning. I have a couple of questions. First, after seeing operating cost growth slow dramatically in the second quarter relative to the first quarter, I was just wondering in relation to your comment, Chris, about some of the cost in 2Q being deferred to 3Q, what costs in particular are you referring to? Is that factored into the cost guidance you mentioned?

Then second, I wanted to ask with respect to Weekend Edition, what percentage of the new advertisers that you brought to Weekend Edition have become repeat advertisers or repeat customers?

Chris Vieth

Brian, I will take the first part of that question. We have shifted some money from the third quarter into the fourth largely around circulation marketing. We also have promotion and new product spending against a couple of initiatives in Dow Jones Newswires as well as Indexes. That money shifted here into the third quarter, but it is included in our expense guidance of total expenses up around 6% and comparable costs up around 2.5%.

Rich Zannino

Just on Weekend Edition, it is not a year old. So to answer the question, how many are repeating one year to the other, we will be able to answer that question in a few quarters. There are advertisers who are constantly using Weekend Edition and in that regard are repeat customers: jewelers like Harry Winston, Travelocity, Home Depot. Jaguar you'll notice is in Weekend Edition just about every week.

So we're very pleased by the advertisers who are using Weekend Edition, and as you will notice from our testimonial campaign running in the Journal, there are quite a number of them who have done their own ROI analysis on what it is like to reach Wall Street Journal readers in the more contemplative environment of the Weekend. Many of them are finding it very powerful both B2C and B2B.

Brian Shipman - UBS

Is there any way to put a number on it?

Rich Zannino

Like what?

Brian Shipman - UBS

Of the new advertisers that have come into Weekend Edition in the last nine months, what percentage have then become repeat customers?

Rich Zannino

I don't think off the top of our heads we can do that. What we could do for you is we could look at display advertisers and what percentage of them are repeating, and I would say it is a very high percentage of them that are repeating. Classified, of course, some repeat because they are there every week, and others are only there once if they only have one thing to sell, and it works the way the Journal usually works, which is it drives the sale. So maybe we can come back to that question, Brian, and talk to our ad sales team and ask them what the answer is. Because we don't have that off the top of our heads.

Brian Shipman - UBS

Okay. I will follow-up with you after the call.

Operator

Our next question comes from Frederick Searby with JP Morgan.

Frederick Searby - JP Morgan

Good morning, thank you. A couple of questions. Factiva looked pretty lackluster. I wondered what is going on there?

Secondly, can you update us on your thoughts with the tax implications or the tax loss carry forward part of that expiring on potentially divesting assets specifically in the Canadian newspaper arena?

Rich Zannino

Sure. On Factiva first, Factiva is actually running ahead of its budget, but versus year-ago levels in terms of our share of the profit, it is down slightly. Once a year we will make adjustments to the content fees, et cetera that Factiva pays to its parent. So Factiva is paying its parent a bit more in the way of inter-company payments, which show up as operating income for us but, of course, depressed Factiva's bottom line. So we get it in operating income, but you will see a little bit less in equity earnings. Do you follow that?

Frederick Searby - JP Morgan

I do. On the community newspaper side, you have talked potentially about looking at divesting select assets. I wondered where you are in that process and if that is still something you are considering?

Rich Zannino

Well, I think you're asking that in the context of the capital loss carry forwards that is expiring. We have never said we were going to be divesting community newspaper properties. We have said that we're looking at alternatives for how we can preserve the $155 million of capital loss carry forwards that otherwise would expire at the end of this year; that is worth about $50 million in cash tax benefit to us. So we continue to look for ways to preserve those.

Frederick Searby - JP Morgan

Such as what? I mean, if you're not looking at divesting?

Rich Zannino

There are possible tax structures one can use to preserve them. We saw some expire a few years ago, and we were not successful a few years ago in preserving them. But we will see what the latest state of the art is on this in terms of whether or not there is an ability to preserve them.

Frederick Searby - JP Morgan

Thank you.

Operator

Our next question comes from Lisa Monaco with Morgan Stanley.

Lisa Monaco - Morgan Stanley

Good morning. Rich, could you just elaborate on your thoughts on the financial category, I guess coming back a little bit after being down in June? Secondly, can you give us an early read on how you are approaching the rate card for next year?

On the licensing services line, I think based on the comments we heard this morning that we should expect declines there for the second half of the year. Is that correct? Thanks.

Rich Zannino

I will take the last part, and Gordon can take the first two. Dow Jones licensing services basically licenses content pools, data, charts, et cetera to primarily retail brokers who then use those items to power their retail websites, and it is a very competitive business.

There has been some consolidation in that business, so as two accounts become one account, they only have one website, they only need to license once set of tools. A combination of that consolidation and some upstart competition there is putting pressure on prices which has resulted in the 9% decline in revenue in the quarter. Our projection is that it will decline a little bit in the third and the fourth as well.

To combat that, we've got a new product development initiative underway where we are developing lots of new products to enhance our licensing offerings so that we can create product that we can get paid a premium for, that will stand above the competition, if you will. Things like our live news, live charts, and live quotes features where you don't have to click refresh to refresh a quote or refresh news or to refresh a chart. They all refresh dynamically as you are sitting looking at your screen, would be one example.

Putting in a more efficient technology platform is another example of where we are looking to improve so that we are able to more efficiently deliver our fees to our customers and also so that we are able to turn tools over to them so that they can modify the feeds that we are giving them and customize them more along the lines of how they might need them.

So we really have to upgrade our product line faster than we have in the past. We have to improve our technology. It is around numbers of $50 million a year revenue business. We believe there is long-term growth in that business as more and more of these retail brokers enhance their sites and also outsource a lot of their intra-network to third-party providers such as Dow Jones Licensing Services.

So long-term we are optimistic about the growth in that business. Short-term we have taken a couple of hits. It is a relatively small business now, so it is dealable. But longer-term we've got to get the product pipeline right. We have got to get the technology platform right. We have got to take advantage of this outsourcing, which is going to occur on the part of those businesses. So that is the forward strategy on it.

Gordon Crovitz

So Lisa, on your question about the finance category and our Q3 outlook, we are forecasting to meet double-digit linage gains in Q3. We think there will be increased spending from some of the larger banks. There are some new insurance advertisers. You have noticed we've got a very strong franchise now in exchange traded funds. We expect that to continue. But this is a category where visibility is limited and performance really could change as to what it progresses depending on what is going on in the macro-environment.

So that is our little bit of color on the finance category. You're also asking about the rate card for 2007. As we thought about that, we start with this position of great strength. We are the number one revenue publication of all 252 tracked by CMR Mag Advisor. We are the number one for dollar revenue increases every month this year and so far this year.

So we are going to put in place we think a rate increase for next year. We expect it to be fairly modest as it was last year as we continue to stand out from the crowd in terms of revenue increases as we go into next year.

Rich Zannino

Diego, we will take one more question, but before we do, I want to come back to Fred Searby's question on Ottaway. Fred, I think what I have said in the past is that Ottaway is a vital contributing part of the Dow Jones portfolio. It generates a lot of cash flow. It is stable cash flow. There are assets that we like and so they would not be for sale.

I think what I have said is, if there were a compelling use of proceeds and we had to raise money, we would consider selling Ottaway properties in that context. So that may be how to connect the dots between what you were asking earlier and the way I answered. So hopefully that adds some clarification.

Okay, we will take one more.

Operator

Our last question comes from Paul Ginocchio with Deutsche Bank.

Paul Ginocchio - Deutsche Bank

Two if I could. I guess the July comp is the first time in over a year where it is positive, it looks like your July linage is up double-digits. Could you just make a comment on that? I guess as we start to go into the fourth quarter and comps get more difficult, can you give us a way to think about linage?

Second, there is a little bit of concern in the market you made some comments in your media review about reducing your print ad exposure to 50% from 70% currently. I think you're talking just about the consumer franchise there. Does that mean big acquisitions, or can you talk about how you think about getting that exposure down?

Rich Zannino

Sure. You know as far as July linage goes, I think we will have a pretty good July. July is a very light month. So anything can still happen in July, even though there is only a few days left. Our guidance is what it is, it is mid to upper single digits for the quarter. July and August are soft. September is more than half of the month, and it is really going to be a function of what happens when ad buyers get back from vacation in early September, so as it has been for the last couple of years.

So we don't focus really so much on the comps we are up against. We are really focused on what programs are out there; what our fees are out there; how can we combine our assets to win as much of the business under the RFPs as we can; how can we create new adjacencies like front page ads to continue to put gas in the tank and create some fuel for growth in print advertising.

I think Gordon put it perfectly: An ad on the front page of the Wall Street Journal is exactly what people are looking for. You're reaching a phenomenal audience in a very differentiated and noticeable way with that. It is one of the ways we can use print in a very, very advantaged way over any other medium, and those are the things that we continue to look for to drive our business.

Gordon Crovitz

I just wanted to add one thing on the front page. I know you're all also readers of the Wall Street Journal, and I wanted to ensure you that we have found ways to have as many articles on the front page of the Wall Street Journal even with a front page ad, and even with the web width reduction.

Rich Zannino

On the percent of print revenue, I made that comment in the context of how total Dow Jones print revenue being a little over 70% of total Dow Jones revenue. I said that going forward we would like it to be 50% or below, and I think we will get there in primarily two ways.

One is the organic growth of the Electronic and Enterprise Media businesses, which are growing faster than the print businesses, along with projecting them to grow faster than the print businesses going forward.

Secondly would be through acquisitions, but the acquisitions of the type that you have seen us do in the past that are strategically logical and obviously with pretty attractive financial returns. So whether it be an acquisition like the Stockton Record or like MarketWatch or like our alternative investor group acquisition, things like that. So we are not talking about doing a transformational acquisition that all of a sudden in one fell swoop changes the character of the Company.

Paul Ginocchio - Deutsche Bank

Great. Thank you very much.

Rich Zannino

Thank you and thank you, everybody.

Operator

Thank you. This concludes today's conference. All parties may disconnect now. Thank you all for your participation.

Copyright policy: All transcripts on this site are copyright Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.