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Martha Stewart Living Omnimedia Inc. (NYSE:MSO)

Q1 2010 Earnings Call

April 28, 2010 11:00 am ET

Executives

Katherine Nash – AVP, Investor Relations and Corporate Communications

Charles A. Koppelman - Chairman of the Board

Robin Marino - Co-Chief Executive Officer

Kelli Turner - Chief Financial Officer, Executive Vice President

Analysts

Analyst for Michael Meltz - J.P. Morgan

Michael Kupinski - Noble Financial

David Bank - RBC Capital Markets

Operator

Welcome to the Martha Stewart Living Omnimedia first quarter 2010 earnings conference call and webcast. (Operator Instructions) At this time, it is my pleasure to introduce Katherine Nash, AVP Investor Relations and Corporate Communications 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 2010 first quarter earnings conference call.

Before we begin, let me remind you that our discussions will contain forward-looking statements which are made pursuant to the Private Securities Litigation Reform Act of 1995 as amended. These statements are not guarantees of future performance and involve certain risks and uncertainties which are difficult to predict. Actual future results 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, www.marthastewart.com.

Thank you and now I will turn the call over to Charles.

Charles Koppelman

Thank you Katherine. It was a solid quarter with year-over-year improvements in profitability across all of our business segments and a 6% increase in overall revenue. We also executed on a significant license agreement with Hallmark Channel for part of our vast television library which I will talk about in a moment.

With these developments we continue to build on last quarter’s overall positive direction. The quarter marked the launch of our new and exclusive Martha Stewart Living brand of home improvement products at The Home Depot stores in the U.S. and Canada. Robin will tell you about the launch and about our overall merchandising performance in a few minutes but I wanted to take a moment here to talk about the significance of this partnership in the context of our diversification and expansion strategy.

With The Home Depot, our Martha Stewart collection at Macy’s, our crafts business at Michaels and independent retailers and our forthcoming pets line at PetSmart we are confident we now have a strong presence across a range of categories where consumers seek our brand and in leading retail outlets where they expect to find us.

We are also undergoing a strategic shift in our broadcasting business as we broaden our presence on air to drive greater growth and profits on a platform that has previously served as a promotional vehicle for our brands. Our teams are working closely with the Hallmark Channel in anticipation of the September debut of season six of the Martha Stewart Show. We are also working on a new and original programming for the network that will showcase personalities and talent from within MSLO.

Just last month Hallmark Channel acquired the exclusive license for domestic television rights to extensive programming from our rich and evergreen library of how-to content some of which is already airing on the network. This agreement further extends our relationship with Hallmark Channel and underscores the value of our archives. With some of the classic programming already airing we are building awareness about our presence on the Hallmark Channel in advance of September when viewers will have new opportunities to watch and learn more from Martha and other MSLO experts.

Publishing ad revenue was up 11% in the quarter including the spring issue of Martha Stewart Weddings. The quarter ended on an encouraging note with the April issue of Martha Stewart Living up 20% in ad pages over the prior-year period. The issue was part of a terrific cross platform marketing program we developed for Showtime in the quarter. Living featured a triple cover on what was our “best of” issue which resonated with Showtime’s message of TV at its best. The program also included sponsorship of our “best of” gallery on MarthaStewart.com along with Showtime video and trailers on the website as well as television, radio integrations and more.

I would like to mention beginning with the June issue we will be publishing Body+Soul under the Whole Living part of the magazine’s title. This is the name of the magazine’s successful standalone website, wholeliving.com, where unique visitors grew 55% in the quarter year-over-year according to Comscore Panel Data. It is also a name of the related daily radio show on Martha Stewart Living Radio. By unifying the brand under one name we believe we are better able to capitalize on opportunities across more media platforms and in merchandising. The magazine and the brand are a terrific growth story. Newsstand sales of the magazine have consistently been strong and the June issue is already up just over 50% in ad revenue compared to the prior year.

We also published two new books in the quarter, both Everyday Food Fresh Flavor Fast and Martha Stewart’s Encyclopedia of Sewing and Fabric Crafts quickly landed on the New York Times best seller list. This is further evidence of our print offerings’ enduring appeal.

Our internet business delivered another strong performance in the quarter with a 17% increase in ad revenue year-over-year. Just this morning Media Industry Newsletter named us a “digital team of the year” and Martha was named Tweeter of the year. Traffic to our sites continue to grow. According to Comscore Panel Data, unique visitors increased 21% in the quarter compared to the prior year. Social media continues to be a growing source of referral traffic to our websites.

We believe we are widely recognized for our innovative use of social media and for our leadership in exploring new distribution platforms. In fact, we recently entered into an agreement with Majesco Entertainment Company, a leading provider of video games for mass market for the exclusive worldwide rights to publish interactive, electronic games based on our content. Gaming is a significant space that is increasingly popular among women. One recent study found that 55% of all social gamers in the U.S. are women.

Our Martha Stewart Everyday Food app for the iPhone and iPod Touch continues to resonate with consumers. It remains among the most popular paid apps on the lifestyle category on the App Store. Martha’s Everyday Food is compatible with the new iPad. You can also expect to find Martha’s Everyday Food in an audio tape from Martha herself as a free app on the Sony Dash, a new device that will launch in May. Later this year we expect to introduce a special digital issue of Martha Stewart Living.

Our presence on these distribution platforms reflects our strategic commitment to be wherever consumers want to find us an on all of the devices they use. On that note I will turn the call over to Robin.

Robin Marino

Thank you Charles. Good morning everyone. Merchandising had a strong quarter with revenues up 10% over the prior year’s first quarter. As Charles mentioned, the first quarter marked the launch of our new and exclusive Martha Stewart Living brand at The Home Depot stores in the U.S. and Canada, at Homedepot.com and in the Home Decorators Collection Catalog. We introduced our Outdoor Living products in January followed by storage and organization and paint. We feel positive about the early results.

We expect our paint program to be completely set in all stores by early May. We have kicked off a significant national marketing campaign to support the launch with national television and print ads including the integration on the Martha Stewart Show and ads in the May issues of our magazines.

Earlier this month the paint was showcased in a national do-it-herself workshop in Home Depot stores across the country with a great turnout. We have also launched into additional categories at the Home Depot stores in Canada including gardening tools, season bulbs and lighting. We will be introducing additional product lines in the coming months and will be sharing details with you on future calls.

Now for a quick update on some of our other partnerships. Our Martha Stewart Collection at Macy’s is their number one home brand and the exclusive destination for our textiles, kitchenware and tabletop items. The line continues to perform extremely well with significant increases across many soft home and houseware categories. Our solid color sheets, moderate bedding, gadgets and food storage were top performers in the quarter and our enamel cast iron cookware remains very popular with our consumers.

We are also developing our Martha Stewart Essentials program which I mentioned on our last call. The program features lower price point products for bedding, towels and cookware and is expected to launch this fall. To capitalize on the new exclusivity of our program at Macy’s they have committed to a significantly increased marketing spend for our brand with new in-store signage, TV integrations and webisodes.

Martha Stewart Crafts has also delivered a strong performance this quarter with double digit increases in sales at Michaels, independent and international retailers. Results were driven by a strong marketing program, increased sales of core offerings like punches and embellishments, new products and expanded distribution. It is worth noting all of our merchandising programs build on our presence in areas where we have strong brand equity. For the Home Depot and Macy’s it is the home, a category that is virtually synonymous with our brand.

Consumers also look to us for craft ideas and inspiration. With Martha Stewart Crafts we have established a national brand in a market that didn’t really have one. We are continuing to expand our presence in other key areas by building franchises in such categories as weddings and pets. Our relationship with Sandals Resorts is proving to be a very good match with Sandals registering double digit growth year-over-year in their weddings business since the January launch of our Martha Stewart Weddings program.

Our Martha Stewart pet line is on track to launch at PetSmart stores later this spring in a range of categories including apparel, grooming, bedding, bath, leashes and collars, toys and more. PetSmart has committed to supporting the launch with a comprehensive marketing program including television, print and digital placements along with in-store promotions.

Last but certainly not least Emeril. Emeril’s merchandising products had a terrific performance in the quarter with double digit increases in several key partnerships. Emeril’s all clad cookware line registered significant growth in sales at both Macy’s and Bed Bath and Beyond. His coffee line with Timothy’s also did very well driven by retail sales of his K-Cup program at Bed Bath and Beyond, Macy’s, Kohl’s and on Amazon.

We are very pleased with these results and are exploring new distribution opportunities. In fact, a long-term friendship between Emeril and Viking founder and CEO, Fred Carl, recently resulted in an agreement where Viking will design and supply a line of outdoor products under the Emeril brand name.

Over the past five years we have worked very hard to build a new foundation for our merchandising business. With a diverse stable of what we consider first in class partners we have strategically repositioned our merchandising business model and we are already seeing the benefits in what has been a solid quarter. We are pleased with the performance of our existing programs and are very encouraged by the early results of our newer offerings. As we begin 2010 we begin what we believe will be a new story of growth and expansion in our merchandising business.

Now Kelli will take you through the financials.

Kelli Turner

Thank you Robin. Our first quarter revenues were better than expected due to the recognition of the exclusive license fee from Hallmark Channel for our library of programming. Otherwise we were on track with where we expected to be for the quarter.

Total revenue was $53.2 million in the first quarter of 2010 compared to $50.4 million in the prior year’s quarter. In addition to the library agreement the increase was also driven by higher merchandising and internet revenues. Adjusted EBTIDA for the quarter was essentially break-even compared to a loss of $5 million in the prior year’s quarter. Net loss per share was $0.07 in the first quarter versus a loss of $0.31 a year ago. Included in the 2009 first quarter results is an impairment charge of $0.13 per share in the merchandising segment.

Now for our year-over-year performance on a segment basis. Overall publishing revenue is basically flat at $28.3 million in the quarter. Advertising revenue increased 11% in the quarter. This was primarily due to the timing of the spring issue of Weddings which is in this year’s first quarter but was in the second quarter of last year. Excluding the impact of Weddings, advertising revenue was essentially flat. Circulation revenue declined 16% in the quarter. Publishing adjusted EBITDA was a loss of $0.8 million in the first quarter of 2010 compared to a loss of $1.4 million in the prior year.

Broadcasting revenue was $12.1 million, up from $10.5 million in the prior year quarter. The increase was driven by the recognition of the exclusive licensee from Hallmark Channel which contributed approximately $5 million partially offset by the Martha Stewart Show and lower radio revenue. Broadcasting adjusted EBITDA was $3.4 million in this year’s first quarter compared to $1 million last year.

Total internet revenue was $3.1 million in the quarter up from $2.6 million in the prior year. Internet ad revenue increased 17%. Internet adjusted EBITDA was a loss of $1.1 million compared to a loss of $1.5 million in the first quarter of 2009. Merchandising revenue for the quarter totaled $9.8 million compared to $8.9 million in the prior year’s quarter. Included in these results is a decrease of $2.2 million related to the end of our Kmart relationship this year and the positive $1 million one-time payment from a merchandising partner. Merchandising adjusted EBITDA was $5.7 million compared with $5.5 million in last year’s first quarter.

Adjusted EBITDA for corporate was a loss of $7.7 million in the quarter, an improvement from the loss of $8.6 million in the prior year’s quarter primarily due to lower severance and facility related costs. Our balance sheet remains healthy. We finished the period ended March 31, 2010 with $45.7 million in cash, cash equivalents and short-term investments and $12 million in long-term debt.

As we look ahead to the second quarter we expect continued stabilization in print ad revenue. As I mentioned, the second quarter of 2009 included the spring issue of Weddings which was in this year’s first quarter. Excluding the spring issue we expect advertising revenue to be flat to slightly up year-over-year.

Broadcasting revenue is expected to be down year-over-year due to the Martha Stewart Show, lower radio revenue and the conclusion of our Turbo Chef relationship last year. In internet we continue to invest in our website to enhance our offerings and expect to see further growth in advertising revenue compared to the prior year’s quarter. In merchandising you should expect growth in revenue and EBITDA in the second and third quarters even with the decline in Kmart before we hit the very tough fourth quarter comp you should be expecting.

Several of you have been asking about our longer term financial picture especially in our merchandising business. We can’t give you specific information by partner but we can tell you that from where we sit today looking out into 2011 we believe that merchandising EBITDA will be around $35 million.

In closing, we had a productive quarter as we began to execute on our new partnership with Hallmark and we began the launch of our products at the Home Depot. As we continue to build on these programs and to focus on managing costs we feel good about our position now and our growth prospects for the long term.

Thank you for joining us on our call today. We will now turn it back to the operator for Q&A.

Question and Answer Session

Operator

(Operator Instructions) The first question comes from the line of Michael Meltz - J.P. Morgan.

Analyst for Michael Meltz - J.P. Morgan

On the Hallmark $5 million payment we saw in Q1 is that a payment for the life of the deal or is that something we should expect to recur over the next year?

Kelli Turner

That is the full payment for the life of this particular deal which has a term of about three years.

Analyst for Michael Meltz - J.P. Morgan

Can you give us some guidance on publishing expenses over the next few quarters?

Kelli Turner

Sure. Publishing expenses continue to be down on the paper side and there has been some savings in other areas. I think you should expect publishing expenses to continue to be some leverage there. Again, in the second quarter we also have one less issue of Weddings so clearly there are some expense consequences of that. Other than that you should expect expenses to be relatively flattish to slightly down.

Analyst for Michael Meltz - J.P. Morgan

A question on merchandising. How is the Home Depot line trending thus far?

Robin Marino

We are loving working with the Home Depot and our teams collaborate daily on the opportunities we have together. We have lofty expectations for this relationship and partnership and I can tell you we are off to a great start.

Analyst for Michael Meltz - J.P. Morgan

Should we expect any sort of big promotion costs related to Martha moving to Hallmark in the third quarter?

Kelli Turner

You shouldn’t expect us to have big promotion costs related to that.

Charles Koppelman

Though there is a full plan that is being implemented that the public will see and will drive our viewers, Martha’s viewers, to the Hallmark Channel.

Analyst for Michael Meltz - J.P. Morgan

So is Hallmark going to be doing those promotions and taking on those costs?

Charles Koppelman

Yes they are.

Analyst for Michael Meltz - J.P. Morgan

There has been some press reports recently on the potential JV with Hallmark on a new cable channel. Can you comment on that?

Charles Koppelman

We don’t comment on speculation.

Operator

The next question comes from the line of Michael Kupinski - Noble Financial.

Michael Kupinski - Noble Financial

In spite of the extra payment your numbers were still a little bit better than mine. Particularly in the merchandising division. I know you don’t break out the contributions there but was there any significant contribution from Home Depot in the quarter? Can you give us a little color on what those contributions might have been? I know it was an early rollout but particularly if you could give us some color on what you are seeing from that partner.

Robin Marino

The only color I can give you is we have 280 gorgeous paint colors at Home Depot right now we are very, very excited about. As I said earlier on the call we are working together with the Home Depot. Our teams are collaborating daily on our many opportunities together. Our expectations are lofty and we are off to a wonderful beginning. That is all I can tell you right now.

Michael Kupinski - Noble Financial

I guess I was just wondering in terms of given the strength of the merchandising numbers it was a little surprising. Was that mostly then just driven by Macy’s and Michaels? Or was there any lift in there or is it just too early to see the numbers from Home Depot? I am just trying to gauge what we might see as we go forward here.

Robin Marino

I can tell you the Home Depot contribution in the first quarter was much smaller than our other performance in the sense that we really just started that business. In fact, we saw wonderful, wonderful lift in all of our other businesses. The first quarter it was only about $1 million of new business related to the numbers in our Q1.

Kelli Turner

That is not Home Depot. That is new business including Sandals, Home Depot, Hanes, so all of our partnerships we didn’t have last year that we do have this year are about $1 million in total but keep in mind that Kmart is also down $2.2 million and we had the $1 million positive from a merchandising partner.

Michael Kupinski - Noble Financial

Regarding Kmart was there a residual payment in the first quarter as well?

Kelli Turner

Yes.

Michael Kupinski - Noble Financial

Can you quantify how much that was? You said it was…

Kelli Turner

As you know because we break out every quarter, last year was about $3.4 million from Kmart in the first quarter. This year in the first quarter our last payment in total was about $1.2 million.

Michael Kupinski - Noble Financial

In terms of you gave some great color on what your thoughts might be for 2011 in terms of EBITDA and merchandising. Any thoughts on that for this year?

Kelli Turner

We are really not prepared…I think we have been getting a lot of questions about the longer term. People know we are launching new relationships and this year is more of a transition. We felt as people have been asking it would be helpful if you could give us anything looking further out. That is what we felt comfortable giving. For this year merchandising, as I said my remarks, you should expect the second quarter and third quarter to be up in both revenue and EBITDA even with the decline from Kmart and then in the fourth quarter obviously there is the very big tough comparison because of the big fourth quarter in Kmart last year.

Michael Kupinski - Noble Financial

In terms of the production and distribution costs that were a little lower than expected, any thoughts on that line item going forward?

Kelli Turner

No. Other than we continue to focus very heavily on cost discipline and manage it carefully but I don’t think there is anything in addition to that.

Michael Kupinski - Noble Financial

Selling and promotion was just a little elevated. Is that a good run rate for the next few quarters as well?

Kelli Turner

I think that it is generally probably an okay run rate. This quarter maybe there was a little extra but I think it is fair.

Operator

The next question comes from the line of David Bank - RBC Capital Markets.

David Bank - RBC Capital Markets

On the publishing side, can you talk a little bit about the trends you are seeing in subscriptions and where you think you are in the cycle generally? The second question in publishing would be obviously a really strong performance in April. We know the industry generally had a pretty big budget flush going into the end of the year, saw a little bit of a tail off in the beginning of the year. Then a ramp up. Can you talk about how May is trending? What sort of drove the differences between April and the other months?

Kelli Turner

I think on subscription revenue first quarter of this year we hit a low point in subscription revenue decline so you should expect the rate of decline to improve throughout the year. I think that is what we can tell you on that front. In terms of advertising April was very strong. We have been seeing some issue to issue volatility. May continues to be relatively strong but not to the same degree as April. We are seeing very strong June performance so far. It is hard to say it is a trend but we have seen positive performance as we said in the second quarter. Again, April was especially strong. May is not as strong.

David Bank - RBC Capital Markets

I am sorry, I don’t know if you can quantify it but the swing factor in the Weddings issue, maybe what came out of one quarter. What came out of 2Q and went into 1Q. Can you give us a ballpark of what the impact was?

Kelli Turner

Last year we had two issues of Weddings in the second quarter and zero issues of Weddings in the first quarter. This year we are having one in the first quarter and therefore it was a good guy in this year’s first quarter and we will have one in the second quarter. Therefore it will be a bad guy in the second quarter. What we did say is with Weddings advertising revenue was up 11% in the first quarter. Without Weddings advertising revenue on the print side was essentially flat. That should give you some sense of the magnitude. The other thing I would say is the second quarter issue of Weddings has been performing quite well. So that obviously helped.

David Bank - RBC Capital Markets

On the merchandising side, can you give a sense of growth on kind of same store deals versus new deals? So if I look at the first quarter how much of that year-over-year growth was from year-over-year growth in existing deals in prior year versus new deals kicking in?

Kelli Turner

We had just mentioned that in Mike’s question where there was about $1 million in the first quarter of this year from brand new deals we didn’t have in the first quarter of last year. So we had just said to be clear there was $1 million positive related to that. $1 million from this one-time merchandising from a partner and then Kmart being down $2.2 million in the quarter.

David Bank - RBC Capital Markets

Pet launches when?

Robin Marino

We are setting the stores up in May with a launch for June.

David Bank - RBC Capital Markets

If you look at the higher profile, more impactful deals, obviously Home Depot and pets, what is the first quarter where you think we will see the full quarter impact from the big 2010 additions?

Robin Marino

We launched Home Depot obviously in Q1 of this year so we will be anniversarying Home Depot in Q1 of 2011. We will be anniversarying our PetSmart launch in the middle of the year in 2011. 2011 will be the year that Macy’s, Home Depot and our Craft business will clearly be anniversarying themselves and when we get to the tail of 2011, the second half of the year, all of those big businesses will be in full swing.

Charles Koppelman

But they will all be up and running in the fourth quarter of this year. I also wanted to clarify a question on the Hallmark Payment earlier. That payment was for part of our vast library, not for the new programs we are going to be producing for the Hallmark Channel.

Kelli Turner

As long as we are clarifying, one other point on Mike’s question on the selling and promotion we did have a very exciting big, up front presentation to advertisers in the first quarter. We hadn’t done this in the past. It is not happening other quarters of this year. We got great results from that but it definitely was a little bit of a bigger impact in the first quarter related to that.

David Bank - RBC Capital Markets

I am sorry, in keeping with the clarifying theme, I just want to clarify my question again on the merchandise side which was really in which quarter in 2010 do you think it is fair to say you have critical mass on what you are doing at Home Depot, the pets launch, or maybe you are at critical mass as of the first quarter? I don’t know.

Kelli Turner

I would say the answer to that in terms of everything being in business is going to be the beginning of the fourth quarter of this year. Even then to be honest with you there will be other product categories that will come out in 2011 at Home Depot so we are still going to be growing our business over the course of 2011 with respect to these individual partnerships. Not to mention other new opportunities we haven’t even announced yet.

Operator

The next question comes from the line of Michael Kupinski - Noble Financial.

Michael Kupinski - Noble Financial

I was wondering in terms of radio revenues what are you down in that number? I thought that was a contract. Am I wrong about that? It was like probably about $1.4 million a quarter?

Kelli Turner

We have talked about this earlier. It is a contract. There was a new contract signed at the end of last year where we went from it being all license fee or primarily license fee to license fee and upside potential on ad revenue but it takes some time to ramp on the ad revenue side of it. That is why radio is down in the first quarter. We hope for it to be down less as we progress on the advertising side.

Michael Kupinski - Noble Financial

On the broadcast side, the TV show, what are you seeing in terms of advertising revenues there? I know you had a pretty strong fourth quarter last year related to some product placements and promotions and things. Are you not seeing any flow through with that?

Kelli Turner

No. Product integrations continue to be up considerably. We are also seeing very strong demand and high rates. The ratings on the show given the difficulty in finding the show; it is on different stations at different times, etc. is hurting the general spot advertising. So there continues to be a lot of demand. Rates are up and integrations are up but the overall advertising is down.

Charles Koppelman

Which is one of the catalysts for our new Hallmark relationship.

Operator

Ladies and gentlemen this does conclude today’s teleconference. You may all disconnect.

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