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Summary

  • Time to report its first quarterly call post IPO on Tuesday with consensus expecting $0.19 EPS and $820m in revenue.
  • Digital transformation will take time given the challenges of converting 98% of its reader base to digital.
  • Q2 numbers will have negative impact of transformation effort. Patience is required.

Time Inc. (NYSE:TIME) will report its first quarterly call post its June IPO on Tuesday. The consensus expects EPS of $0.19 and revenue of $820m. Webcast of the call can be found on its investor relation site. Like many of its publishing peers, Time's 100 or so magazine titles such as Time, People, Sports Illustrated have been suffering from both print circulation and advertising revenue decline as readers migrate to digital content. New management has come in to transform Time into a digital platform, essentially betting on a reinvention of the famed publications within the digital space. While I agree with this transformational move, I would say that this will likely be evolutionary to be revolutionary and this stock is only for investors with both courage and patience.

Moving to digital

Internet and digital content have taken a toll on traditional publication such as TV and print, both of which are undergoing a period of decline in ad revenue, viewers/readers and engagement level as the attention and ad dollar are shifting to online and digital. Time is facing a typical case of Darwinism; the failure to adapt will ultimately lead to its extinction, and the management is proactive (and determined) to transform Time's 100 or so publications into digital content.

The company is facing an uphill battle:

  1. >98% of its readers are still subscribers. Transforming them into digital will take a lot of persuasion (or promotion?) to convince them to make the switch.
  2. Lack of video content will not make Time competitive against news networks that already have a solid video presence online, plus there is the threat of YouTube where people turn to for news.
  3. Over concentration of revenue stream in print publication, which is in a structural decline.

That said, investors should look for strategic signs from the management on how they are planning to make this transition a success. One possible way is via the freemium model (since it is difficult to convince people to pay for online magazine) that balances a portion of free and paid content.

Slightly negative in Q2

According to Time's 8K filings, the company's 2nd largest wholesaler defaulted on a payment that was supposed to be due in May, resulting in $18m negative impact on revenue, $7m in bad debt and $2m cost for the transition to a new distributor. On top of that, there is another $29m expense to settle a lease obligation on its rent. This type of cost, in my view, is typical of a company undergoing a transitional period. Nonetheless, these costs will be a negative to the bottom line so patience is required for investors of this stock.

Source: Time Q2 2014: Looking For Signs Of Digital Transformation