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Executives

Daniel Taitz - Chief Administrative Officer & General Counsel

Kenneth West - Chief Financial Officer

Katherine Nash - Vice President, Communications and Investor Relations

Analysts

Michael Kupinski - Noble Financial

Martha Stewart Living Omnimedia, Inc. (MSO) Q2 2013 Earnings Conference Call July 30, 2013 8:30 AM ET

Operator

Welcome to the Martha Stewart Living Omnimedia, Second 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, 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 second quarter 2013 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 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. Thanks for joining us.

MSLO’s second quarter results showed improvement on a number of levels. Highlights in the quarter included the launch of multiple categories of Martha branded products in 550 J.C. Penney stores and on jcp.com. Improved print advertising revenues at Martha Stewart living, strong growth in digital advertising revenues and the reduced net loss.

Speaking more specifically to J.C. Penney, with the launch of (licensed) merchandise, we began recognizing royalty revenues this quarter, which drove growth in merchandising revenue and operating income. The J.C. Penney launch included Martha Stewart branded merchandise in six new categories; Celebrations, Pantry, Windows, Rugs, Lighting and Mirrors. While it’s still very early we are particularly pleased to note that MarthaWindow’s has already become the number one window treatments brand at J.C. Penney.

Overall, while there is still quite a bit of work to do on the path to returning to a sustainable performance improvement, we are encouraged with the progress we are making. Ken will walk through the details in a moment.

Before he does, I just want to point out that closing arguments in the contractual dispute with Macy’s will be made August 1 with the decision expected shortly thereafter. Given the timing, we will not be discussing the dispute on today’s call, I also want to add that our CEO search process is continuing. The Board is working diligently with the executive search firm Korn/Ferry to identify the best available candidate to fulfill this unique role.

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.

As Dan noted, the results feature a number of bright spots that are evident of strategic progress. Of course, there are still a good business to go to achieve our goals but the headway we are making is a positive sign. Revenue for the quarter totaled $42 million compared with just shy of $48 million in the year ago quarter.

Performances led my merchandising which was up a 11% driven by the commencement of recognition of royalty revenues from the J.C. Penney partnership which as you recall was not factored into the outlook we provided on our last earnings call.

Revenues from both publishing and broadcasting were lower than last year due to the strategic actions we took last year related to print title and live television programming production. Our overall profitability measures improved in the quarter. Our consolidated operating loss was approximately $600,000 compared with nearly $3 million a year ago. And our net loss per share narrowed to $0.02 half with the $0.04 reported in the prior year second quarter.

Key contributors to the bottom-line improvement include merchandising performance a better than expected publishing results that I will detail in a moment and lower corporate expenses.

Turning to the segment starting with publishing. Publishing revenue totaled $24 million down from just under $29 million a year ago. Absent last year’s contribution from Everyday Food and Whole Living, our revenue improved modestly in the quarter due to two factors. Advertising revenue growth at Martha Stewart Living and a 26% improvement in digital advertising revenue. These factors along with recognition of some of the benefits of our cost reduction activities led to a publishing operating loss in the (inaudible) of $5.7 million.

While this loss shows an increase from the year ago period due to investments in advertising sales and digital operations the loss was less than forecast. We are on track to begin showing improvement in publishing operating performance in the second half of the year as we told you on our last earnings call. These improvements are noteworthy but this remains a challenging business. Performance was restrained by circulation revenue which declined year-over-year due to softness at newsstand. And sales improvement does come at a cost as we have a stronger but larger digital ad sales team in place. The same is true where we have made investments in building capabilities introducing and distributing short form video.

Obviously, we need publishing to be profitable and as a result indicate we will need sustained growth in revenue and further expense reductions to get there. Our digital performance is strong if I noted though, of course, the revenue base in this category is still significantly smaller than print. We relaunched marthastewart.com in the quarter, which present our content in a way that delivers better utility to our users and continue to see growth in unique visitors a positive sign that we are on the right track strategically.

Overall, we are seeing strong year-over-year growth in advertising impressions both in traditional display and especially in video as we develop more short form video content. Video impressions are up by a factor of 10x from a year ago when we were very small with substantial revenue increases as well.

Like many popular websites, we are also seeing a significant shift in mobile, accessible and useful mobile content is Bible in today’s market and our grand strength in food and other how to lifestyle content decisions as well. As we monitor the shift, it is clear that our user dynamic is becoming more purpose driven and in other words more users are coming to our site seeking specific content or ideas and then moving on.

This translates to growth in visits but lower paid views and time spent. And this is to be expected and most important is the growth I just referenced and (it is not) that advertisers are responding to our integrated digital offering.

Let’s now turn to merchandising. Revenue increased 11% over the prior year’s quarter and about 40% sequentially from Q1. The swing factor was the initial recognition of J.C Penney royalty revenue which was not factored into our guidance. This growth was partially offset by lower royalties in the quarter from the Home Depot as anticipated.

With respect to the Home Depot, as communicated on last quarter’s call second quarter result (helped the) effect of our partner’s decision to feature fewer SKUs of our popular patio product this season.

However, we were pleased that in the quarter, we began to see an upturn in the paint category which has been weak for sometime as we executed a repositioning of our paint products at the Home Depot.

I will now turn to broadcasting. Revenue came in a little under $2 million compared with $4.6 million last year this variance reflects our exit last year from live programming production. While this business is now much smaller from a revenue perspective, it is contributing profitably to our results with offering income of $1 million compared to offering income of approximately $1.5 million last year.

We are currently in the second season of Martha Stewart’s Cooking School on PBS and also in April Martha Bakes debuted on PBS. Given the sponsored nature of public television programming which is not advertising driven programming on PBS provides important brand visibility and an opportunity to expand our reach -- how to education and enrichment.

Both series continued to perform well on PBS reaching an average of 1 million viewers each week and are available in most PBS market. Corporate expenses amounted to $7.7 million in the quarter down from $8.6 million in the prior year. The absence of compensation for the open CEO position is a primary driver of this decline and we also saw a modest reduction in legal expenses in the quarter.

Looking at the balance sheet we ended the quarter with about $48.5 million in cash, cash equivalence, short-term investments restricted cash on investments down about $0.5 million from year-end 2012 and no borrowing.

Looking ahead, I will now turn to our outlook for the third quarter. For publishing, revenues expected to approximate the amount recognized in our second quarter with only two issue of Martha Stewart Living versus three last year in our third quarter on a slightly lower expense base as we continue to make economies within this operation. As a result, the anticipated segment operating loss before last year’s impairment charge will be considerably improved over the prior year’s third quarter with the most significant expected improvement to materialize in our fourth quarter.

In broadcasting, we continue to anticipate non-material revenues and an operating income level that approximates that prior year’s third quarter. In merchandising, we are seeing early success in the Window categories with our Martha Stewart Window products leading sales in that category company wide at J.C. Penney and look forward to the conclusion of our ongoing litigation with Macy’s on which we do not plan to comment. Taking all of our merchandise businesses into account third quarter revenue and operating income is anticipated to increase slightly over last year’s third quarter.

Corporate expenses in the third quarter are expected to approximate our second quarter and again, include estimates of legal fees. Last year’s third quarter consolidated results included a non-recurring write-down of goodwill and as a result estimated consolidated operating income for this year’s third quarter will be significantly improve with an anticipated loss of approximate $2 million.

That concludes our prepared remarks. And now, we would like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Michael Kupinski with Noble Financial.

Michael Kupinski - Noble Financial

Well, first question, first on regarding the publishing side in your guidance and can you talk a little bit about the revenue prospects you are going forward, have you been satisfied with the bills, infrastructure bills and how that progressing and then can you talk a little bit about given your guidance for the Q3 and you indicated that more expense reduction might be needed. Can you chat a little bit about the types expense reduction that you are looking for in that – any indications on how much that might impair the first quarter in terms of write-offs and things like that – (inaudible) some things like that?

Dan Taitz

Michael, good morning. With respect to publishing, what we’re experiencing right now is what we had hoped for and that is some good growth in ad revenue from staffing up our entire ad sales team and we’re expect that to continue into the second half more or so than we’ve seen in the second quarter. So, in fact our fourth quarter is anticipated to do the biggest quarter of the year and that’s in our future. What gives us the confident to associate with that ability to see that growth is not like the performance we just on the second quarter which is not sufficient enough for us to be satisfied yet but is a fact that we are now starting to secure some major new advertising customers like the March of Dimes and General Motors and the (inaudible) and others.

So, we’re seeing a good return of existing customers from 2012 and now some growth with brand new customer’s advertisers in different categories and that’s what is going to start propelling this business to the proper direction.

Michael Kupinski - Noble Financial

Okay, fair enough. In terms of merchandizing, can you talk a little bit about obviously (inaudible) people being weak, can you talk about whether or not Macy’s grew in the quarter? And then also going forward in terms Home Depot, it seems like just doing a (teletype) with some of the stores that if you -- even if you factor out the outdoor furniture that maybe that’s -- it looks like the numbers of SKUs may have gone down even if you adjust for the outdoor furniture.

Can you talk a little bit about the relationship with Home Depot and how that’s progressing and if you are getting things back on track so to speak with that company?

Dan Taitz

Sure. What’s most important with respect to the Home Depot is the fact that although we’ve seen some declines in the SKU specific to outdoor patio that we’ve addressed over the last three or four quarters and we had seen in the past some softness in soft-flooring and paint. And now as I noted in my prepared remarks that paint is starting a recovery, we’re very happy with that.

The Home Depot is still a very important significant partner to us in our future. They got the confidence in our designs and products and as we disclosed a year ago, they renewed for an additional term last year and we’re enjoying the benefits of that and working together, I think very well now and for the future.

Michael Kupinski - Noble Financial

Do you think that Home Depot gets back on track from here going forward?

Dan Taitz

Yes.

Michael Kupinski - Noble Financial

Although will be expanding the number of SKUs, I mean, can you add any thoughts on the number of SKUs going forward then?

Dan Taitz

Specifically and particularly I do not have the details associated with that but I know the direction of Home Depot is a positive.

Michael Kupinski - Noble Financial

And in terms of the second quarter was Macy’s up in the quarter or is that down?

Dan Taitz

Macy’s was principally flat with the prior year second quarter.

Michael Kupinski - Noble Financial

I mean in terms of your guidance for Q3, can you talk excluding your benefits from J.C. Penney’s getting into that guidance, what do you have for -- do you like Home Depot and Macy’s and so forth?

Dan Taitz

Okay. I really prefer not to comment specifically on the economics of any individual partner in the portfolio, all of our merchandised partners but just give you the direction of the major players which we have actually spoken about so far. So, Michael, I prefer not to go into specifics on any component. That’s okay.

Michael Kupinski - Noble Financial

Okay, fair enough. Okay. That’s all I got for now.

Dan Taitz

Thanks Michael.

Operator

And at this time, there are no further questions. Presenters do you have any closing remarks?

Dan Taitz

No, I think that wraps up the call for today. Thank you very much.

Operator

This concludes today’s conference call. You may now disconnect.

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