Martha Stewart Living Omnimedia Q3 2006 Earnings Call Transcript

Oct.31.06 | About: Martha Stewart (MSO)

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

Q3 2006 Earnings Call

October 31, 2006 10:00 am ET


Howard Hochhauser - Chief Financial Officer

Susan Lyne - President, Chief Executive Officer, Director


Lisa Monaco - Morgan Stanley

John Klim - Credit Suisse

Robert Routh - Jefferies & Co.

Michael Meltz - Bear Stearns


Good morning, and welcome to the Martha Stewart Living Omnimedia third quarter 2006 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 Howard Hochhauser, Chief Financial Officer of Martha Stewart Living Omnimedia. Sir, you may begin when ready.

Howard Hochhauser

Thank you very much, and good morning, everyone. Welcome to our conference call to review third quarter 2006 results. Susan Lyne, our President and CEO, will speak about some of our recent initiatives, and I will talk about our recent performance and our guidance for the fourth quarter of 2006.

Our prepared remarks should take about 20 minutes, and then we will open it up for your questions.

Before turning the call over to Susan, I will remind you that our discussions will contain forward-looking statements which are made pursuant to the Private Securities Litigation Reform Act of 1995, as amended. These statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Actual future results and trends may differ materially from what is forecast in forward-looking statements due to a variety of factors.

Now, let me turn things over to Susan.

Susan Lyne

Thank you, Howard, and thanks to all of you for joining us on our third quarter earnings conference call and webcast. I am delighted to be able to share the results of what has been another successful quarter for us, with excellent year-over-year numbers in this important building year for the company.

Revenues grew 48% to $61.1 million -- that is against $41.3 million for third quarter ’05 -- driven by a strong performance in publishing and significantly improved year-over-year figures for all business segments.

I am pleased to report that we came in ahead of our third quarter guidance and expect our full-year revenue to come in at the high-end of our previous forecast.

2006 has been a transitional year for the company, a year of turnaround and resurgence in our core business, but just as importantly, of investing in new businesses that will drive results next year and into the future.

On our last earnings call, we detailed the many new merchandising initiatives we have embarked on, all part of a strategic move to diversify our product line and broaden our distribution channels. We will continue to pursue this strategy going forward, but our watchword this quarter was execution. We are running on all cylinders right now, as we prepare our new product lines, new content areas, and our very promising Internet re-launch. We have set a very high bar for these upcoming ventures to ensure that we deliver on our brand promise with each and every launch.

I want to talk about the company on a segment-by-segment basis, beginning with our Publishing division, which has been a significant growth driver this year.

Earlier this month, Martha Stewart Living topped MediaWeek and AdWeek’s first ever Brand Blazers list, honoring the top 10 magazines to cultivate new revenue streams by extending the core brand.

Living continued to register strong growth in advertising revenue, generating a 38.8% increase in ad pages and a 73% increase in ad revenue. Everyday Food had a phenomenal quarter, an 81.7% increase in pages and 142% increase in revenue. Body and Soul upped its rate base for the second time this year from 350,000 to 400,000. Ad revenue was up 48%, and the magazine attracted new blue chip advertisers, including Donna Karan, Proctor and Gamble, Lincoln Mercury, and Ford.

We anticipate strong growth in ad pages to continue through the fourth quarter.

I am particularly pleased to report that, as a result of the gains at Everyday Food, we now expect the title to be profitable this year, a year ahead of schedule and only three years after our September 2003 launch.

We recently shipped Martha Stewart’s Home-keeping Handbook, a 700-page encyclopedia of caring for your home. This book has been 15 years in the making -- actually, Martha says that she has been working on it her entire adult life. The fact that Clarkson Potter is launching the book with a first printing of 500,000 reinforces our belief that this will be a must-have title for every household.

This quarter also marked the publication of a second issue of Blueprint, our newest magazine aimed at women aged 25 to 45. We again comfortably met our rate base guarantee of 250,000. We expect to raise that rate base to 350,000 in ’07, when we will publish six issues of Blueprint.

Advertisers have embraced the magazine. The latest issue showcased a full spectrum of categories, including fashion, beauty, home furnishings, automotive, travel, and food and beverages. We feel very confident about this new magazine, both in terms of its clear editorial voice and its prospects as a go-to lifestyle title for a younger generation of women, and we are not alone.

Media Industry Newsletter named Blueprint one of the hottest launches of the year, and honored publisher Sally Preston as one of their launch people of the year, and yes, launch people of the year is actually what they call this honor.

The success of our publishing team even rubbed off on me, with Advertising Age naming me Executive of the Year, one of many perks of having talented people working for you.

You will note that the segment came in modestly below guidance. This was due to some costs associated with our September 30th Good Things event, celebrating the 15th anniversary of Martha Stewart Living. While the event was highly successful with customers as well as advertisers, it proved to be a bigger investment than we anticipated.

Our broadcasting business also registered impressive growth, driven by revenue from our hour-long syndicated daily television show and the Martha Stewart Living radio channel on Sirius Radio.

The Martha Stewart Show began its second season last month, and yesterday was renewed by NBC’s O&Os for a third season. Ratings are on track with our expectations and up-front advertising sales were strong. This is a very advertiser friendly show, and integrations are coming in ahead of plan.

To further monetize the show and serve viewers who cannot watch it live, we are now making it available for next day viewing on

The Martha Stewart Show continues to drive consumer demand for our product, and to drive readers and users to our magazines and Internet sites. In fact, I cannot overstate the power of the Martha Stewart Show as a marketing tool for our business.

The season launched with a special sweepstakes that culminated in the giveaway of a KB Home in one of our Martha Stewart communities. Viewers could enter the sweepstakes, either through our website or their local affiliates, using daily clues from the show. The contest caused an overwhelming spike in traffic to By the end of the promotion, we had logged nearly 24 million entries.

I should note that our Everyday Food show on PBS is also thriving. This show is now sold out for the third season that launches in January.

As part of a company-wide strategy to enhance our presence on the web, we recently entered into a non-exclusive deal with Google to offer a broad selection of our video on their site. We will share revenue on ads they sell. It goes without saying that this additional exposure should also serve as a promotional tool for the show.

On to Merchandising. This quarter, we announced an agreement with The Lowe’s Company Inc. to offer Martha Stewart Colors, a new interior and exterior paint color program. Martha Stewart Colors will be introduced at Lowe’s 1,275 stores nationwide in early 2007.

This new agreement is an important building block in the strategic expansion of our merchandising business across three key categories: home decorating, including our forthcoming Martha Stewart Collection at Macy’s; home building, with KB Homes; and now, home improvement.

We will continue to add to the home improvement line with floor coverings, lighting fixtures, bathroom fixtures, kitchen cabinets and closet organizers, and expect a full selection to debut late next year, initially in KB Studios nationwide.

As is the case with all of our licensing deals, we will have no inventory or capital costs. Our principal investment is in our design staff, which we had been expanding to meet the needs of our new product lines, including our Martha Stewart Collection at Macy’s, as well as Martha Stewart branded area rugs with Safavieh, carpet tiles with Floor, and lighting and ceiling fans with Quality Home Brands.

Our existing product lines with K-Mart and our furniture collections with Bernhardt remain significant contributors to our revenue stream and continue to be singled out for excellence. The Martha Stewart Signature Furniture Collection received four nominations and won two awards at the 2006 American Society of Furniture Designers Pinnacle Awards. We were the only nominee with two wins at the award ceremony earlier this month.

Our last earnings call coincided with the grand opening of our second Martha Stewart KB Home Community. In a softening real estate market, these beautiful, well-designed and relatively affordable Martha Stewart branded homes continue to attract value-conscious homebuyers. KB Homes CEO Bruce Karatz noted, in the most recent edition of BusinessWeek, that the first 300 homes offered for sale were snapped up by buyers. The next two sites in Katy, Texas, and Perris, California, will launch in early 2007, and we expect this initiative to continue to generate substantial revenues for our company as we roll out additional communities.

The Internet is an increasingly important segment for us, and we continue to operate on dual tracks this quarter, maximizing the value of our current site while investing in a new, richer, more functional and user friendly site to launch first quarter ’07.

We have made several key hires in marketing and advertising this quarter, and put in place new systems that allow us to track inventory and revenue. That investment is already paying off, as we are virtually sold out of fourth quarter inventory.

On an earlier call, we outlined an Internet strategy that included migrating our assets across the web. In addition to the Google video deal this quarter, we also forged a new content relationship with Yahoo! Lifestyle. This will bring a new revenue stream to the segment, which is a good thing in and of itself, but with links on every page of content, we also expect it to be a traffic driver to our website.

This month, we are also launching a new search engine that will vastly improve our site search, while also offering up edited web results. Culled from thousands of sites, these are our experts’ most trusted sources online.

Earlier this month, we launched our new line of Martha Stewart brand of digital photo products, in collaboration with Kodak, beginning with a large selection of holiday cards. There is really nothing else on the market like these stylish, easy-to-create products. I have already ordered four sample versions of my Christmas card, and if I can do this, believe me, anyone can.

The non-print digital photo market is still nascent, but is expected to grow two-, three-fold next year. We will continue to expand our offerings throughout November, adding photo books, calendars, stickers, mail-in labels, and gifts, and new categories in the next order and throughout 2007.

I am going to segue from the Internet for just a minute to note that we are making tremendous progress on our off-line crafts assortment as well. Martha Stewart Crafts will launch in April with about 37 linear feet in each of Michael’s 900-plus stores nationwide, and roll out to independents several months later. We have noted that crafts is a $30 billion business in this country, and there is currently no national brand. We are about to change that.

We will continue pursuing new initiatives, including further distribution of Martha Stewart Assets across the web, and digital devices, as well as developing new tools and templates as we prepare for the re-launch of our website. We have set our sights high and feel confident that the Internet represents an enormous upside for the company. With 90 million women online and deeply underserved in the lifestyle arena, this company is extraordinarily well-positioned to be a significant and innovative presence in the digital realm.

Now, I will turn the call back to Howard to walk you through a detailed financial review and our guidance for Q4 and the year.

Howard Hochhauser

Thank you, Susan. As Susan stated, this was an excellent quarter for us as our business continued to strengthen. Total revenue in the quarter was 48%, or $19.7 million to $61.1 million, while our operating loss improved $19 million to $7.9 million, and our adjusted EBITDA loss improved $8.9 million to $2.6 million.

Excluding the benefit from our resolution for the former licensed merchandising licensee, our EBITDA loss would have been $5.1 million, ahead of our guidance of a loss in the range of $5.5 million to $6.5 million.

I would like to touch on some of the financial highlights for the third quarter.

In Publishing, advertising pages at Martha Stewart Living increased approximately 39% and advertising pages at Everyday Food increased 81%, with advertising revenue increasingly ahead of page growth at both magazines.

Publishing also benefited from improvements at Body and Soul magazine, where advertising revenue grew 47%. The quarter included an investment in Blueprint of approximately $1.2 million.

In Broadcasting, our results include both the Martha Stewart Show and our Martha Stewart Living radio channel on Sirius Satellite Radio.

In Merchandising, comp store sales of our product at K-Mart decreased 7.2% in the period, while year-to-date sales are down about 3.4%.

Our Internet segment reflects advertising revenue of $1.5 million, relative to $400,000 in the prior year quarter. Results also include revenue related to our Kodak agreement for online photo products, along with improved results from our flower business.

We continue to invest in our Internet segment in advance of our re-launch in Q1 2007.

Corporate expenses decreased largely due to the absence of expenses that occurred in the prior year quarter, which consisted of higher levels of non-cash compensation, principally related to divesting of certain warrants granted in connection with the airing of The Apprentice.

In the third quarter, the charge related to stock-based compensation was $3.0 million, compared to $13.3 million in the prior year period.

After adding a special one-time dividend in the amount of $27 million, we finished the quarter with $84 million in cash and short-term investments.

Turning to the fourth quarter, we expect to report continued meaningful year-over-year improvements. This will occur despite our spending on new initiatives.

Given the renewed vitality of the business, we believe that it is important to invest in the long-term, and we are executing on new initiatives in publishing, merchandising, and Internet. In particular, we may invest some of the gains from the third quarter in direct marketing initiatives which would have otherwise been spent in 2007.

We also remain active in seeking prudent acquisitions for the company.

Let me now provide you with fourth quarter guidance on both a consolidated and segment basis.

On a consolidated basis, we are expecting fourth quarter revenue in the range of $91 million to $95 million; operating income in the range of $10 million to $11 million; and adjusted EBITDA in the range of $16.5 million to $17.5 million.

On a segment basis, our guidance is the following:

  • For Publishing, fourth quarter revenues are expected to be in the range of $42 million to $44 million, while adjusted EBITDA loss is expected to be $1.0 million to $1.5 million, including a $1.5 million to $2 million investment in Blueprint. Recall that Q405 included revenue and EBITDA related to our book business of approximately $2.5 million and $2 million, respectively, and included revenue from our kid’s magazine;
  • Broadcasting revenues are expected to be $9 million to $10 million, and adjusted EBITDA loss for the quarter will approximate $0.5 million, which includes certain non-recurring employee costs;
  • Merchandising revenues for the quarter are expected to approximate $35 million, while adjusted EBITDA will be in the range of $29 million to $29.5 million. Our expenses will be about $1 million higher year over year, as we invest in staff to support some of our new initiatives, including our Martha Stewart Collection for Macy’s;
  • We expect Internet revenues to be $5 million to $6 million for the quarter, with an adjusted EBITDA roughly flat with prior year, as we continue to invest in people and technology in preparation for the re-launch of our website in early 2007;
  • Corporate expenses will be approximately $10.5 million.

With this, our full-year guidance for 2006 equates to the following:

  • We now expect to report our full-year revenue at the high-end of our prior guidance of $270 million to $280 million;
  • We expect to report full-year operating loss in the range of $6.5 million to $7.5 million, with adjusted EBITDA in the range of $14.5 million to $15.5 million, up from our initial full-year adjusted EBITDA guidance of $10 million to $12 million, which we subsequently increased to $12 million to $14 million;

To give this updated guidance some context, we note that since providing our initial adjusted EBITDA guidance in February, we have increased our investment spending in the following ways:

  • Increased spending in Blueprint by $1 million to $1.5 million, bringing the total to $6 million to $7 million;
  • Added $1 million of costs to support the launch of Macy’s, among other programs;
  • Modestly increased our investment in the Internet business to $4 million; and finally,
  • We have added approximately $0.5 million in marketing costs to support the launch of season two of the Martha Stewart Show.

We believe strongly in reinvesting in our business for future growth. Even with all of these investments, we remain on track in our commitment to deliver free cash flow in 2006, excluding any settlement payments.

This concludes the formal part of our presentation. I would now like to turn the call back over to the conference call operator.

Question-and-Answer Session


(Operator Instructions)

Our first question is coming from Lisa Monaco with Morgan Stanley. Please go ahead.

Lisa Monaco - Morgan Stanley

Could you just clarify the adjusted EBITDA guidance for the year of $14.5 million to $15.5 million? I assume that includes the $2.5 million one-time benefit in retail?

Howard Hochhauser

That does. We are going to take part of that benefit and we may increase the Blueprint investment from $6 million to $7 million. There is some direct marketing we need to do next year, so we are considering accelerating investment, which effectively accelerates the return.

Lisa Monaco - Morgan Stanley

Then, you nudged revenue guidance higher, and I assume that includes the $3 million, one-time retail benefit as well, but excluding that, where would you say you are seeing upside in terms of revenues relative to your expectation, or the greatest amount of upside?

Howard Hochhauser

I think the publishing business is doing phenomenally well. Susan gave out the revenue numbers, so Living up 70-plus, and Everyday Food up 140-plus in ad revenue are pretty strong numbers.

Then, looking to the fourth quarter, while our main pages look modestly low, I would just remind you that last year, we had a 25-page insert that we are overcoming, so our fourth quarter Living pages, for mean purposes, will increase 5% but revenue is going to increase about 25%. Everyday Food, you have the same thing, where you see a growth in revenue ahead of pages.

Lisa Monaco - Morgan Stanley

Just looking at ’07, how should we think about your investment spending, and how we should think about margins for next year. Can we assume that we should see some improvement in profitability? How do you balance the investment spending versus any upside or profit growth in the company overall, specifically publishing?

Howard Hochhauser

Talking about publishing, we are going to see continued ad revenue growth ahead of the industry. We are going to have rate base increases at Living, Everyday Food, and Body and Soul, so you have rate base increases, you will have rate increases, and page increases, so you could expect to see a high teens revenue increase.

With respect to investment, the only real investment next year is in Blueprint, and we have not given that a number yet, but Everyday Food at this stage was in the north of $10 million investment level, so you could expect that.

The other point that will benefit from next year is the book business, which you will see some new announcements.

Lisa Monaco - Morgan Stanley

Then just two other questions.

Susan Lyne

The other thing I would note here is that on our merchandising business, we have had to ramp up a lot of additional staff in order to be able to design 1400 product SKUs for Macy’s and close to 1,000 product SKUs for crafts, and the Kodak program, and many of these programs, we will not begin to see revenues on until the second-half of ’07, but they are significant revenues, so we will begin seeing the upside from that investment next year.

On the Internet side, again we have made a significant investment this year and still managed to keep that a pretty flat business, but we do see a big, big revenue upside there next year.

On the merchandising side, we are still looking at about a 70% margin on that business.

Lisa Monaco - Morgan Stanley

Okay, and in terms of retail in the first-half of the year, should we see that some of the investment spending picks up in anticipation of the launch of the program?

Susan Lyne

Not pick up. We have made the hires for those programs, so it will remain pretty stable from here on out.

Howard Hochhauser

You will see the benefit of EK Success, the craft program, launches in the first quarter. So you will see the benefit of that. The wholesale load and retail will launch in the second quarter. So you will see some benefit the first-half. The second-half of the year we will benefit from Macy’s.

Lisa Monaco - Morgan Stanley

Then just two unrelated questions. What do you expect the cash balance to be at the end of the year, after the litigation expense? Could you just elaborate -- I think you said the same store sales at K-Mart were down about 7%. Thank you.

Howard Hochhauser

Our year-end cash balance, prior to the settlement, is $70 million to $75 million. The company’s portion of the settlement will be about $15 million, which may be a mix of cash and stock, so it is $15 million of value. It depends upon how it is paid out.

With respect to, and Susan raised a good point. Right after year-end, we will receive the [true-up] payment from K-Mart, which may approximate $30 million this year, so you will see an increase in our cash balance at the end of Q1.

I am sorry, your other question was K-Mart sales?

Lisa Monaco - Morgan Stanley

K-Mart sales, yes.

Howard Hochhauser

Areas of weakness? Is that generally the question?

Lisa Monaco - Morgan Stanley


Howard Hochhauser

We have seen some softness in soft home, in particular. Other categories, for the year-to-date period, garden is actually up, as is housewares. So two of the three categories are up, and there is some softness in soft home. We are actually going to refresh certain of those product categories.


Thank you. Our next question is coming from William Drewry with Credit Suisse. Please go ahead.

John Klim - Credit Suisse

Good morning. It is John Klim for Bill Drewry. Your Internet revenues are starting to really become a meaningful part of the equation. Susan, given your background in TV, I would like your thoughts on the potential for online video as it pertains to revenues over the next three to five years, call it. Then, just another top-level question. Could you talk a bit about your strategy for growing the business over the near-term? What business segment do you believe represents the greatest opportunities? Then, could you touch on your strategy of building versus buying assets? Thanks very much.

Susan Lyne

Sure. Let me take the first one. If we knew what the ultimate potential of video was online, I think we would be hailed throughout the industry. I do not think anybody knows what the ultimate upside is, although it is clearly driving an enormous amount of new Internet traffic right now, so it is an area we need to be in.

We have an enormous amount of video and it is almost all evergreen and easily slice-and-dice-able, so we will be rolling out more programs like that Google program over the next period of time.

There is one clear business model that is working for Internet companies right now, and that is the ad-based content business. In order to fully participate in that, we really have to invest in a new site. As I think a lot of you know, our Internet site was built pre-e-commerce. It was the Internet portion of our catalogue business, so it is very unwieldy for the kinds of things we want to do now.

But we have a phenomenal site redesign. I think everybody at the company is really excited about it. Extremely user friendly, very, very robust search results. We have been doing a lot of testing with it recently, and after we get through this first launch, we will be working hard on personalization, community, things that again we believe are particularly valuable to our audience.

We have a number of different communities of enthusiasts who are part of the Martha Stewart customer base -- crafters, people planning weddings, new moms, people looking for Halloween costumes, cooks, people who entertain, gardeners -- you name it.

We have enough rich media, print, video, photography, how-to instructions, patterns, to be able to serve up an enormous amount of valuable material, and then allow people to talk to each other and to share their own information.

When you see the Home-keeping Handbook, you are going to understand how valuable that can be online as well. There is nothing about the home that is not covered in this book, and I think that is going to go again be an enormously popular, valuable site for people.

We are -- look, we have looked long and hard at the lifestyle offerings that exist on the web right now, and they are either very focused on one area, like weddings, or they are just not very rich.

Given those factors, and the fact that there are 90 million woman online now, we think there is a huge opportunity for us.

Was there a third question you had for me? Acquisitions.

John Klim - Credit Suisse

Then building versus buying.

Susan Lyne

Yes. We have a lot of success building. Everyday Food is a great example of that. This is a magazine that we launched three years ago and is now profitable. That is almost unheard of. This company I think is extremely good at creating new products, new businesses. That said, we are keeping our eyes increasingly open for potential acquisitions, but they have to be priced right. We are trying to be proactive here and to look at a lot of companies that could be interesting content plays for us or undervalued brands that might exist out there that could allow us to Omnimedia something new.

It is not something we feel we need at this point, but if the opportunity is right, we will do it.


Thank you. Our next question is coming from Robert Routh with Jefferies. Please go ahead.

Robert Routh - Jefferies & Co.

Good morning. A few quick questions. First, when it comes to the KB Homes deal that you have, it has obviously been successful so far. One of the concerns certain investors have is how far you can stretch it. I was just curious if you could give us a sense as to how many communities you plan on doing KB.

Susan Lyne

I do not think we know the answer to that yet. In our planning, we have been relatively conservative, looking at maybe adding another six communities next year, six to eight communities next year, and a similar number the following year. I think that, given the success of the program, KB would like to ramp it up, but we need to find the right communities, the right sites. They have to work for our brand, ultimately.

It is an interesting moment for this kind of business. I think KB was actually quite prescient and understanding that the market was beginning to soften and that they were going to need to find differentiators in order to really begin or continue to sell in this current climate.

We will have a lot more visibility on that next year. I think you can assume we will six or eight more communities next year.

With each of these too, the thing to remember is that there is a multiplier effect, because really you are selling stages in these developments. They will sell 100 homes and then back away from selling and build, and then they might release another 80 homes four months later.

I think for planning purposes, they look at selling anywhere from 100 to 200 homes per development per year, so for our Cary development, ultimately that will be 650 homes. Our Atlanta development will be 800 homes, so they are gifts that keep on giving.

Robert Routh - Jefferies & Co.

Great, and then just two more questions. First, I was wondering if you could comment on the Lowe’s deal for paint, and whether or not that deal could possibly be expanded going forward for other products that Martha Stewart brand has been creating and will create in the future.

Second, I was wondering if you could comment a little bit on how the company is focusing not only on the existing demographic but how they are really kind of expanding that demographic to take into account a much younger audience, as well as the older audience, so that it is kind of more of a popular of a brand to everyone, as opposed to what some people think.

Susan Lyne

Sure. Look, one of the reasons we decided to launch our paint business with Lowe’s is that they are just such a great retailer. We would certainly like to expand our presence there. Right now, we are very focused on launching this paint program. I know they are as excited about it as we are. It is a whole new palette and really extraordinarily beautiful, but 60% of all paint sales now take place at either Lowe’s or Home Depot, so we want to be where people shop.

It is one of the things that has come back to us over and over again in our research, that when people are not buying our products, it is because they say they are not available where they shop. So yes, rolling out a larger presence at Lowe’s is certainly in our sights.

On the demographic side, one of the interesting things about this company, if you come up here, we are about 700 strong now, is that it is filled with young people. Our company demographic is probably 25 to 35, for the most part. Extremely talented, young people who want to work in a creative atmosphere.

Really, a lot of the push for us to start Blueprint came from that group. They are just as interested in entertaining and crafting as their older colleagues are on my end of the spectrum. It is their voice you see in Blueprint.

There is a big demographic out there that we know is actually interested in much of what we do. The Weddings magazine, obviously, is a younger demographic already, so this is a way for us to hold on to that customer after she gets married and to kind of walk her through another life stage before she hits Everyday Foods and Martha Stewart Living.

Robert Routh - Jefferies & Co.

Great, and just one final question. What does the paint deal do to your deal with Sherwin Williams?

Susan Lyne

It replaces it.


(Operator Instructions)

Our next question is coming from Michael Meltz with Bear Stearns. Please go ahead.

Michael Meltz - Bear Stearns

Thank you. Howard, I did not hear, or maybe I just did not write it down properly, could you tell us if the Publishing group, what was the MSL advertising and circ performance and what was total Publishing advertising and circ performance in the quarter?

Then, you ran through something about things that will bolster ’07 growth, and you snuck in there, there is a rate base hike at a few of the titles. Could you give us a little bit more clarity on that? Then I have a follow-up.

Howard Hochhauser

Yes, so let’s talk about ad revenue first. Consolidated ad revenue was up 75%, MSL up 73%, and Everyday Food up 140%.

Circ revenue, subscription revenue at MSL is actually down. We are trying to manage the bonus a little better. The newsstand revenue is up, so on a consolidated basis, total circulation revenue is actually flat for the period.

Now, let’s jump to next year --

Michael Meltz - Bear Stearns

That is for MSL or that is for the group?

Howard Hochhauser

I am saying for the group, general circ revenue is essentially flat --

Michael Meltz - Bear Stearns

MSL was down?

Howard Hochhauser

-- with sub revenue coming in, offset by some increases in newsstand revenue. I would also just remind you, last year we had a kids issue.

Let’s jump to next year. Next year, you are going to see a rate base increase of about 50,000, which is about 3%, at MSL from 190 to 1950.

Michael Meltz - Bear Stearns

January 1?

Howard Hochhauser

Yes, Jan. 1. Then you are going to see an Everyday Food increase from 850 to 875.

Michael Meltz - Bear Stearns

Also Jan. 1?

Howard Hochhauser

Also Jan. 1. Then, you just have your open rate increases of about 5%, and then you have your page increases.

Michael Meltz - Bear Stearns

So you are saying pricing up 8% at MSL? With 3% --

Howard Hochhauser

We will go the street with pricing up 8%. You are not going to realize all of that, but that is what we will go to the street with.

Michael Meltz - Bear Stearns

Okay. Thank you for that. Then, could you talk a little bit about, you mentioned the publishing trends, or MSL trends in the quarter, and the comp issue that you have with the inserts last year. Could you just talk a little bit -- though about now December I think is probably closed. You are selling into January. What are you seeing out there as you look forward?

Howard Hochhauser

Let me just go back to the December comment, just because it is relevant. Our pages now are roughly 25% of what they were in our peak periods.

Susan Lyne


Howard Hochhauser

Sorry, 75%, 25% off. Thank you. 75% of what they were in the peak period, and the revenue is growing a lot faster than the page growth. With respect to the market, it is strong. I think the market was down the past, the overall magazine market was down the past two months. We were up. What we are seeing is just a lot of lack of visibility, so the lead times have been tightened, but nonetheless, we are still getting the pages.

Susan Lyne

Is your question, Michael, whether we think the growth at Living is petering out? Because if that is the case, then the answer is no. We still believe -- we are not anticipating single-digit growth next year. We are anticipating good, double-digit growth at Living and certainly wildly outperforming the market as a whole.

Michael Meltz - Bear Stearns

Good. Then, secondly, or my follow-up is, could you talk about at the TV, for the Martha television show, just give us some data on the ratings performance and what the expectation is going forward?

Susan Lyne

We are essentially meeting our expectations, our planning for the current season. Our household number this past week was a 1.4. We think that will ramp up some as we get into these heavy holiday periods, as it always has in past years. But it has been pretty stable there, and I think that it is clearly working for the NBC O&Os as it is for us at that 1.4 number.

If you look at the four shows that launched this year, four new shows, three of them will absolutely not be coming back. The Rachel Ray Show is doing very nicely, but a stable show that has a good, strong core audience and that is very advertiser friendly definitely has a place in the daytime market.

Michael Meltz - Bear Stearns

Just to clarify though, what is the year-over-year comparison on ratings?

Susan Lyne

I believe that last year we were a 1.6 or a 1.7. We ended the season around a 1.4, so it is closer to what we were in May than in September, October.

Howard Hochhauser

The [integrations] have improved, relative to last year, so it is not a direct tie-in to our revenue.

Michael Meltz - Bear Stearns

Last question, I know it is still early, but the Kodak deal, you seem pretty excited about. Could you just talk about how that is performing thus far?

Howard Hochhauser

Let me just jump in before we get to Kodak, on the show. Without our integrations last year, we did for the full season about $1 million of integration. I think we will do that this fourth quarter alone. So last year we got out of the gate a little late, selling some of the inventory.

Michael Meltz - Bear Stearns

Does that show up in TV, or is that in publishing, the integration?

Howard Hochhauser

That is TV. TV sells it. It is on the TV show. It is all TV revenue. We also were sold out of the PBS show, and that will draw between $0.5 million to $1 million of profit this year.

I will kick it back to Susan for Kodak.

Susan Lyne

It is still really early. I hesitate to even get into this because card sales do not really ramp up until after Halloween, and the 10 days that are crucial are Black Friday through about the 10th of December. That is when the vast majority of card sales take place.

That said, we saw some nice numbers for our Halloween cards, and we are seeing a nice ramp-up of this, obviously starting from scratch, but the day-by-day increases are looking good.

We will know a lot more about this business after we get through this first round, but I think we are very bullish on this digital photo arena, because we know we can make a difference in it, in our designs and our formats. We have already introduced a few new templates that are clearly going to be popular, and I think year by year, that business is going to build significantly. It is a very high margin business too.


That does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day.

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