Welcome to the Meredith Corporation's fiscal 2011 fourth quarter and full year results conference call. (Operator Instructions) As a reminder this conference is being recorded today, Thursday, July 28, 2011.
I would now like to turn the conference over to your host, Mr. Mike Lovell, Director of Investor Relations. Please go ahead.
Good morning and thanks everyone for joining us. We'll start today with comments from Chairman and Chief Executive Officer, Steve Lacy; followed by Chief Financial Officer, Joe Ceryanec. And then we'll turn the call over to questions. Also on the line this morning are Paul Karpowicz, President of our Local Media Group; and Tom Harty, President of our National Media Group.
An archive of today's discussion will be available later this afternoon on our investor website and a transcript will follow that. Let me remind you all that that our remarks today will include some forward-looking statements and that actual results may differ from forecasts. Some of the reasons why are described at the end of our news release issued earlier today and in some of our SEC filings.
And with that, Steve will begin.
Thank you very much, Mike and good morning everyone. I am certainly pleased to report that we delivered growth in revenue, profit and cash flow during our fiscal 2011. We grew total company revenue, and several of our business activities delivered record revenue performance including political and digital advertising as well as Meredith's integrated marketing and brand licensing.
Local non-political advertising revenue grew 4%, a second year in a row of growth. We decreased total company operating expenses by 2%. This is the third year in a row that we've delivered expense reductions from operation. We increased total company operating profit by 22% and expanded our operating profit margin to 16% and that's up from 13% last year.
We grew free cash flow by 11%. We returned nearly 40% of this cash to our shareholders through dividends and our share re-purchase program significantly more than last year. We increased our dividend 11% and restarted our share re-purchase program.
In addition to these financial highlights, we increased our already strong connection with American consumers in fiscal 2011. This overarching initiative really spans all of our media and marketing platforms and lies at the heart of Meredith's unique consumer proposition.
Meredith continues to reach 75 million American women at important life stages providing them with valuable information on caring for their families, their home and their own health and well-being.
As we continue to aggregate these large consumer audiences, we're confident that advertisers and marketers alike will continue to use Meredith's properties to reach the consumer. To position the company for the future while accelerating revenue profit and cash flow growth, we're continuing to execute against a series of very well-defined strategic initiative, first of all, increasing our already strong consumer connection.
We completed creative enhancements to several of our major magazines and have more planned for fiscal '12. We grew magazine readership and television viewership while generating double-digit increases in traffic across our 60-plus websites. Additionally, the Better syndicated daily lifestyle television show will broaden its reach to more than 80% of American households this fall by adding New York City, the nation's top market.
We're also strengthening our core-magazine and television businesses. Advertising rates grew in both of our business over the prior year. Operating margins improved in both national and the local media group. We completed a number of re-engineering initiative to improve efficiency and reduce costs as we look to the future.
We continue to aggressively expand our digital activities; we re-launched a series of key websites including BHG.com and Recipe.com and have more digital enhancements planned for fiscal '12 including the rapid expansion of our mobile apps and additional tablet addition.
We're also extending our key brands to new products and services. Our Better Homes and Gardens brand licensing program continues to grow at Walmart stores, and is now about six times larger than when the program was launched less than three years ago.
In fiscal 2012, we'll be promoting recent product extensions including paint, bath décor, and ceiling fans and lighting while continuing to emphasize our core bed, bath and décor products. We continued to significantly grow Meredith's integrated marketing, delivering record revenue in fiscal 2011. We secured key contract renewals with clients, including Kraft and Chrysler and significantly expanded our programs with major clients such as Lowe's and Ford.
Cross-selling new services to existing clients and winning major new business are of course pillars of Meredith's integrated marketing growth strategy. Our goal is to grow this business into our third major activity by fiscal 2014. We've also completed several acquisitions and investments to increase our scale our capability.
We assumed day-to-day operations of Turner Broadcasting System's Peachtree TV in the fast-growing Atlanta marketplace. We purchased the EatingWell Media Group, completed our acquisition of the digital Real Girls Media Network and acquired mobile marketing leader, The Hyperfactory.
Importantly, we significantly grew the amount of cash that we've returned to our shareholders. Our business is built on a model that delivers very strong, stable and growing cash flow. We generated about $2 billion in cash flow over the last decade and returned about half of that cash to our shareholders over this time frame.
Clearly fiscal 2011 was a year of significant achievement for the company. However, there were challenges as well. While the National Media Group advertising revenues grew in the first half of our fiscal year, we experienced about a 10% decline in the second-half when compared to the prior year. This was due primarily to a pull-back in advertising spending from food and beverage related companies due to sharply higher commodity prices as well as by home related due to continued weakness in that market place.
We significantly over indexed the magazine industry in these categories and together they accounted for nearly three-fourth of our net second-half magazine advertising decline. On an overall basis though, the magazine industry posted a healthy 4% growth in ad revenue on a 1% in ad pages if measured against the second half of our fiscal year according to the latest data from Publishers Information Bureau.
We continue executing a series of revenue generating and cost saving initiative to improve our performance across the company. I'll share some of those with you in a moment along with a more detailed financial review. So now let's review the operating performance of groups beginning with Local Media.
Fiscal 2011 operating profit grew more than 65% due to 4% growth in non-political advertising revenue and a record $35 million in political advertising revenue as well. We grew total revenue by 14% to $322 million and EBITDA margin improved to 35%. Both were are our best performance since our fiscal 2007.
From an advertising standpoint, we again outperformed the industry in fiscal '11. Our performance was broad-based as revenues rose in eight of our 10 largest ad categories with automotive, retail and media leading the way. Another factor driving our success is the strong connection we built to the local consumer as well. This was demonstrated by our strong rating performance in fiscal '11 particularly in our station in Hartford and Flint/Saginaw where they continue to lead their individual market place.
In Hartford, our local Better Connecticut show grew considerably in its 3 p.m. time slot. In the fast growing news, day part in the morning, our stations in Hartford, Las Vegas and Flint/Saginaw were each number one in their market place. News viewership at our CBS facilities in Atlanta and Kansas City grew as well.
In late news, our stations in Portland, Hartford, Nashville, Kansas City, Las Vegas and Flint/Saginaw were each either number one or number two in their individual market. Our CBS facility in Atlanta began operating Turner Broadcasting Peachtree TV in fiscal 2011 actually in April. This arrangement provides us with access to a larger share of advertising revenue in the fast growing Atlanta marketplace. We also grew non-advertising revenues in fiscal '11 as re-transmission fees grew about 10%.
Looking into early fiscal 2012, we'll continue to accelerate a series of strategic initiative to help offset the absence of the record $35 million in political advertising we delivered in fiscal 2011. These initiatives include contributions from our Peachtree TV relationship as well as increased emphasis on our largest market where we have the greatest growth opportunity; Re-designing of our websites and the launch of additional mobile apps to increase our share of local digital revenue along with continued expansion of the Better show.
Now turning to our National Media Group, operating profit grew 6% from the prior year to $180 million, the group's best performance since pre-recession fiscal 2008.
Operating profit margins were 16.7% up from 15.5% in the prior year. We increased our net revenue for advertising page more than 5%, grew revenues in activities including Brand Licensing and Integrated Marketing and maintain a strong discipline on expenses which were down 3% for the year.
These factors helped offset a 4% decline in advertising revenue. Our National Media Group brands strengthen their connection to the individual consumer in fiscal 2011. Magazine leadership continued to grow to a record $111 million according to the most recent data from Mediamark Research and Intelligence.
We also grew the number of unique visitors to the National Media Group websites by 13% to a record $22 million. BHG.com unveiled a new site design to improve not only consumer experience but help optimize revenue generating opportunities. Our acquisition of the Real Girls Media network adds more than $4 million monthly unique visitors to the Meredith women's network.
Sales of our branded products at retail continue to grow thanks largely to the ongoing success of the Better Homes and Gardens line at Walmart stores across the country. The number of SKUs increased 50% to approximately 3,000.
During fiscal '11, we introduced tablet editions of many of our brands on iPad, video, and Barnes & Noble's Nook platforms as well as through the magazine industry consortium's next issue Media.
We're excited about tablets, because we can offer a deeper and richer experience to our consumer and there is also the potential for a significant production saving overtime. However, as you all know, it's very early in this new platform and the business model is still evolving.
Fiscal 2011 circulation revenues declined 7% due primarily to the previously announced magazine rate based changes and the repositioning of our Special Interest Media business which we gave in late fiscal 2010. In fiscal '11, as a result, we published 117 Special Interest Media issues and that's 30% less than the 163 issues we published in fiscal '10.
Fiscal 2011 fourth quarter operating profit at the National Media Group increased 5% to $49 million. Revenues were $275 million compared to $287 million in the prior year.
To continue improving National Media Group performance, we are aggressively delivering against the recently announced Meredith Engagement Dividend to the advertising marketplace. This new product offering uses the Nielsen Company's highly regarded Homescan data and our own 85 million name consumer database to prove increased product sales at retail as a result of print advertising in Meredith brands.
This is truly groundbreaking for the magazine industry. In an era of increased expectations for accountability, we can now prove that Meredith magazines deliver increased sales and improved ROI across the board.
We are also expanding our scale in capabilities in the food category which has historically been a strong growth driver for Meredith and the industry as a whole. And we believe it will continue to be so overtime. In fiscal '11, we acquired the EatingWell Media Group and re-launched Recipe.com, which combines trusted recipes with instant in-store savings and manufacturer coupon.
We are building scale in the fastest growing ad category including retail, beauty and health and these are categories where Meredith has historically under-indexed the industry taken as a whole.
We're increasing our emphasis on digital and multiplatform ad programs, and we are accelerating our digital consumer marketing initiative to move more subscription acquisition, renewal and consumer service activities online.
Finally, we are akin to continuing to aggressively grow revenue at Meredith Integrated Marketing and Brand Licensing, neither of which are dependent on traditional advertising. Before turning the conversation over to CFO Joe Ceryanec, I would like to reiterate the strong progress we made in fiscal 2011 along with a long-term growth in cash flow generation prospects for Meredith taken as a whole.
Now Joe will provide more financial detail and update you on our guidance for fiscal 2012 and our first quarter.
So as we've said here a year ago, we provided guidance for fiscal year 2011 EPS between $240 and $275 a share. As we announced this morning, we finished the year at $278. So while we hit some headwins in the national media advertising as moved into calendar 2011.
The growth in many of our other business units and our continued execution on the cost side allowed us to beat the top and our initial guidance. As Steve mentioned, total company operating expenses were down 2% for the year even though corporate expenses were up about $4 million reflecting our investment in Next Issue Media and the Tablet development.
We continue to generate strong cash increasing at 11% in fiscal 2011 and during the year, we grew the amount of cash returned to shareholders by nearly 50%. We raised our dividend 11% to 18% straight years that we've increased it.
We also re-initiated our share repurchase program in invested $25 million in repurchasing our shares during the year. We currently have approximately 550,000 shares left under the current authorization. We ended the year with debt under $200 million and were arguably under levered by historical standards. We believe this provides us with a lot of flexibility in the future.
We're in a strong position to increase the amount of cash that we returned to the shareholders and capitalized on opportunities to expand our business portfolio as they become available.
Now turning to our views of early 2012, we believe that the high commodity prices continued weak home market and the persistent high unemployment will likely mean continued albeit moderating ad weakness International Media Group for the first-half of fiscal '12.
In our Local Media Group, first quarter pacings to date have been affected by the NFL dispute, which we're glad ended this week, and also by Japan's natural disasters' impact on the auto industry.
Our Local Media Group is also facing the every other year decline in political ad revenues. As a result, we expect continued improvement in National Media Group ad revenues with moderating declines in the first-half of the fiscal year turning to modest growth in the second-half.
With two of our three issues closed, fiscal 2012 first quarter magazine ad revenues expected to be down in the mid single digits compared to the prior year period. In Local media, where we'll be cycling against $34 million of net political revenues in the first-half of fiscal '11. With nine weeks left in the quarter, non-political TV ad pacings are down in the low single digits compared to the prior year.
We expect fiscal 2012 first quarter earnings per share to range from $0.45 to $0.50 and full-year 2012 EPS to range from $2.40 to $2.80.
So with that, we'll now open it up for questions.
(Operator Instructions) Our first question comes from the line of Jason Bazinet with Citi.
Jason Bazinet - Citi
Just two quick questions, what's a reasonable year do you think to begin the forecast of sequential declines on the re-trans line due to reverse comp? Is that sort of a 13 issue or 14 issue?
And then my second question, I don't know if you had a chance of see sort of a Digital IQ Index that was put out by a group I think earlier this week that sort of rank-ordered how digitally savvy various magazines titles were. I just wondered if you have any comments on whether the study made sense to you directionally and how Meredith stacked up relative to other publishers.
Regarding retransmission, the first time that we'll have any meaningful impact, at least our belief, is going to be in our fiscal 2013. So there is really no issues we'll be dealing with in fiscal '12. And at time, there'll be the impact of the renegotiation of our CBS affiliation agreement and Fox, and the opportunity at that time could be renegotiating the arrangements we have with the major MSOs across the country.
So as we move forward, to get a better sense of what the marketplace looks like, we'll be able to begin to calculate the puts and takes as it relates to kind of all of those coming up for renegotiation over what will be about an 18-month period that kind of begins in calendar '12 and goes for about 18 months beyond that.
So no impact that we're aware will be dealing with in '12. And I'm not aware or haven't seen that report you're speaking to, but we've made a note of it and we'll get of hold of it and give you some thoughts.
Our next question comes from the line of Michael Corty with Morningstar.
Michael Corty - Morningstar
In terms of the guarantee of top advertisers that the article that recently came out in Ad Age, just had a few clarifying questions on that. Obviously, companies have always been at some kind of measure of performance. So I was just wondering how long you've kind of thought about doing something like this and kind of what pushed you over the edge to kind of roll this out.
At this point, it was indicated that it's for your top advertisers. At what point, does that become a slippery slope in terms of obviously if I'm not in that top 10 and I'm just under that, I want a kind of guarantee like this as well. So I was just hoping to get some clarity on those issues.
Tom, since you are kind of the visionary around how this got put together, can you provide a little bit more color and also give the group on the call a sense of kind of early marketplace reaction, of course knowing that no deals have been cut, but in terms of the intake in inquires you had from the marketplace.
This started about a year ago when we had Nielsen in talking to us at a high level how we could expand our relationship between our two companies, and we've heard from the marketplace that clients were demanding and asking for more ROI and more analysis around what particular media was driving results for them. Not all media impressions across different mediums are the same.
And we've spent a year with Nielsen on this project now using their home scan and matching our database. We measured results around four major advertisers with us and 14 brands across the gamut of consumer packaged goods. And in May, we concluded the results. Of the 14, every single measurement had a positive sales lift and a positive ROI measurement.
So when we looked at it, we felt we had a very good size of 14 brands that we can go out to the marketplace and make this guarantee. And we think it's groundbreaking not only for the print business, but also for the media business.
The result so far from our announcement on Monday has been overwhelming with inquires from all the top advertisers that want to meet with us. We had over the last couple of weeks about 20 meetings and every meeting has been very, very positive. To your question on the 10, because we are taking some risks, we want to come to an agreed upon return. We're guarantying that we're going to have a sales lift and an ROI lift. And we have to determine what that is and measure it.
And since we are taking some risks, we are going to limit that to 10 advertising companies to start. And then obviously, down the road, maybe open that up again, but right now we are limiting it to 10.
Michael Corty - Morningstar
You talked about a minimum level of advertising. How should we think about that in terms of what kind of raise does a minimum level have? In terms of a minimum level, what does that mean in terms of getting more out of those advertisers?
Each client is going to probably be a little different. It will be a little bit of a negotiation. But we are looking for each client to raise their advertising commitment to Meredith and also increase their share with Meredith as we compared into the industry in calendar year 2012.
So this is usually when we begin discussions with our major advertisers about calendar year 2012, and as part of that for them to participate in the Meredith Engagement Dividend. We'll be looking for them to increase their commitment to us and also increase our share of market compared to our competitors.
Our next question comes from the line of William Bird with NI.
William Bird - NI
Steve, just wondering if you could just talk a little bit about some of the factors that lead you to believe that National Media Group advertising maybe will grow in the second half. And secondly, I was wondering if you could just talk a little bit about how National Media Group digital performed?
I am going to give you a little bit of kind of the high level from my perspective on National Media, but I will ask Tom to take that maybe provide his perspective as well. We were coming well towards the end of calendar '10, as I think you're very well aware, if you followed us. I think for about as long as I have been with Meredith. With really what we saw was pretty good wined up at our back. And I found it so interesting that if you recall when we released our earnings for the first half of our fiscal 2011.
We had record results ever and I guess at that point was the 108 year history of the company. But as we turned the corner really began with seasonality's significant headwinds with our major advertisers. Of course that had an impact on the second half. And Tom and his team are very very aggressive I think with innovative program like he just talked about from the level of the Engagement Dividend and taking share. But I think it's also really critical to remember that our really strong concentration in the food category in particular is what carried us for a series of years during the economic downturn, when I am sure you remember we felt significantly outperformed the industry.
And now we're in a little bit of a period of time here while those major companies readjust their price at retail where that's underperforming the industry. But the magazine industry as a whole in the first half of calendar '11 had revenue growth and page growth. So what's going here is I think particular to a couple categories. And I think that will have itself sorted out, absence some major shop to the system. As we turn the corner in the 2012. And of course we're up again much weaker comps in the first half of '12.
So Tom, why don't you add some color around that as you are so much closure to day-to-day?
Thanks Steve, I think your point about the timing of the comps that were up against, because we had such a weak second half of fiscal '11, makes us a little bit more optimistic. What we hearing, when we're talking to clients that, out clients are now starting to raise some price on their products and the pressure that they felt in the short-term on their margins, and they're being coming a little bit more optimistic as we turn the corner and hopefully into that calendar year 2012 see the broader economy recover.
We are up against a very strong first half that we experienced in fiscal 2011, the July to December period. So we're seeing right now in our first quarter kind of what we saw in our fourth quarter moderating a little bit, but still down year-over-year. But we are optimistic with some of the initiatives we have especially around the Engagement Dividend that we're partnering with Nielsen that we're going to see growth in 2012.
So well the second half of your question on digital, it was up in the mid-20s in the first half of the year. You probably remember that down in the mid-teens in the second half, then when you balance that all up. It was up kind of in the low single-digit range for the full fiscal year '11, but it was again kind of a tail of two halves.
William Bird - NI
Do you think you see return in that business in the September quarter?
Tom, you'll have to answer that I think our belief is yes that it will be up some, but you're closer again to Tom.
On the print side, we closed our issues earlier. So we have two issues closed for the first quarter. We have about two, two-and-a-half months to go on the digital side. It seems to be improving somewhat. But again, to Steve's point, we are up against very strong comps. Digital was up in the 25% range for the first half of our fiscal last year. So we're optimistic that we're seeing it improved but I'm not willing to say that it's going to be up significantly at this point.
William Bird - NI
And could you just touch on what you're seeing in print ad pricing in the September quarter?
The ad pricing for us in fiscal year '11 was very strong as we look at our CPMs, as Steve mentioned in the call was up 5.7% when you weighted average against all of our titles. We're seeing an increase still so far in two closed issues in the first quarter. We're seeing a modest increase in our CPMs for the first fiscal quarter.
Yes, at this point there was a low single digit increase compared to what we would have seen in those same two issues a year earlier.
Our next question comes from the line of Mark Zgutowicz with Piper Jaffray.
John Crowther - Piper Jaffray
This is John Crowther on for Mark. Just wondering guys if you could speak towards the guidance range maybe some of the variables that drive sensitivity to both low and high end, as we can look at next year?
Sure, absolutely. And I'll give you some thoughts and then ask Joe Ceryanec if he wants to add to that. Obviously the simplistic ones are of course page volume and pricing that Tom Harty just spoke to in the National Media Business. And then digital which actually in a lot of way performed more or like our television business because we can book later and also cancel later if you will. So it has a little bit more volatility to it.
Then on the flip side of that in some ways is our own version of commodity pricing, which is the world of paper. It has bit of an inverse relationship where when we come off of a stronger period, we generally experience some price escalation. And when we come off with a weaker period, we generally have a bit of relief in paper.
And then if you move over to the television side of the business, certainly there are some varied categories, specific issues that drive that business and with automotive being 25% of how that business comes to market. What goes on at the national level and the local level in terms of consumer behavior and related advertising spend is one of the most critical factors.
I think one of the exciting factors as we think about moving towards calendar '12 is the beginnings again of another political cycle and how soon will it begin and how strong will it be. And interestingly enough when you're in high, it feels like it never ended, because they are back here again everywhere you look with all sorts of activity going on there.
Meredith integrated marketing tends to be a bit more step functional. The opportunity for a new client is a big plus. It should. One of the major clients decides to exit one of the meaningful program, of course you have a step function in the other direction. So that may be a little bit more than you were looking for, but those are maybe the 10 factors that we play with when we put our guidance together.
John Crowther - Piper Jaffray
I can talk about two specific ones you reference there, one on your own input cost. Maybe you can give us your thoughts on paper and you know some of the input cost on the National Media side as we moving into '12.
Yes, I guess John, right now we do expect to speak to the middle of our guidance. We do have some expectations that paper prices will continue to increase. As you may remember we have quarterly parameters around price increases or decrease. And that we re-negotiate those contracts at the beginning of each calendar year. But the mid range of our guidance would have paper up and mid-single digits. If we see that prices get softer. Obviously as Steve pointed out there is multiple inputs we go through when we forecast, obviously advertising on the magazine side and on the broadcast side as the biggest driver as we look to the high to low.
On the input side we do have paper in the mid point in those mid-single digits. If it's softer we know that would help move to the high. And as we see it even get worse. That's one of the factors among many, many that would move us to the lower into range.
John Crowther - Piper Jaffray
And maybe I can just ask one more, focused moderate to topline on the national side. Maybe you could give us, quantify a little bit about the performance of integrated marketing in this most recent quarter? And maybe some of the trends you're seeing there contrasting to the advertising cycle, you're currently working through with your magazine?
For the full year, integrated marketing was up about 10% and that was pretty similar to where it was in the fourth quarter as well.
We did about $180 million in integrated marketing revenues this year. And back to your earlier question, our midpoint expectations for next year, that would grow similar to this year, as Steve said, high single digits, low double digits.
That business has performed very well this past year. And frankly, we look to be after a good start as we move into fiscal '12.
Yes. One of the positive factors is certainly in the first quarter guidance for sure.
Our next question comes from the line of Michael Meltz with JPMorgan.
Michael Meltz - JPMorgan
I think you touched on the expense question. But can you tell us more discretely what's the expectation of segment cash cost increases implied in your guidance efforts for Q1 and full year please?
On the National Media side, on the expenses in Q1, we expect to be down slightly from Q1 of the prior year and pretty much similar for the year. And that's National Media excluding MIM. With MIM, revenues up, we would expect those expenses to be up somewhat as well for both Q1 and for the year. So when you aggregate our National Media segment with the magazine business down a little bit, MIM up some, probably flat to maybe down slightly for the year.
On the broadcast side, we expect in Q1 and the full year expenses to be down slightly as well. Call it low single digits, $35 million of political. We had higher commissions. We expect next year without the political. On the corporate side, in forth quarter, we had pretty heavy expenses because in large part of the MIM and the tablet development.
I would expect next year our run rate goes back to a little more normalized run rate of between $8.5 million and $9.5 million a quarter, which is our historical average. Taxes we expect to be where we've been, between 39.5%, 40% for the year, with some seasonality among quarters.
Michael Meltz - JPMorgan
The EPS range, $2.40 to $2.80, does it impact the low end and the high end? What is the expectation for magazine advertiser?
At the low end, we started the year as we guided Q1, down mid-single, and it pretty much stays there with maybe getting closer to flat in the second half of the year. But for the year, it would be down at mid-single digit. As we mentioned, our mid-case has us down in the first half, but actually going to up a little bit in the second half. And then the high-case has a little more of bounce-back as we move into calendar '12.
Michael Meltz - JPMorgan
So high-case is gross for the year?
High-case actually for magazine, excluding digital, is about flat.
Michael Meltz - JPMorgan
What were retrans revenues in the fiscal year?
I'm going to say 25 off the top of my head, but pretty close to 25.
Michael Meltz - JPMorgan
I think, Steve, you've said you have key (inaudible) MSO renewals '12 and '13. Can you maybe give us a little bit more detail who do you have and when?
I don't have all that detail by MSO. We certainly get it, because we've done a lot of calculations. I'll Joe follow up and get back to you. We don't have it here in the room, Michael.
What I can tell you, Michael, is that if you start July 1, 2012, which would be the beginning of our fiscal '13, and you go through the fiscal year to June 30, 2013, all of the big MSOs and the two big satellite providers renew within that 12-month period. So everybody of significance will renew during our fiscal '13.
And that number on the retrans was actually around 26.
Our next question comes from line of Barry Lucas with Gabelli & Company.
Barry Lucas - Gabelli & Company
Steve, maybe drill down a bit on the television side, or if Paul could, as you look at the modest core decline. How much of that is auto? How much are you expecting auto to be or how is it pacing? And built into the expectations, are you anticipating a recovery as Japanese nameplate inventory improves?
Barry, which quarter are you speaking about on TV revenue?
Barry Lucas - Gabelli & Company
Yes, let's talk about the current quarter.
So at the moment, Q1 of '12 are going get to the right pages. Many small numbers on the paper here, and then Paul I'm going to give some specifics numbers and then ask you to kind of speak to the environment. So pacing through last Friday, on an overall basis would have automotive up a little bit and that driven a little more on the domestic side with the import side continuing to be weak.
And in the fourth quarter of '11 automotive was actually down about 12%. So it's a pretty big bounce between where we were in Q4 and kind of, what the early pacings were. And Paul you might just a give a sense what you're hearing as you did with the guide\guys in the market place.
Relative to auto, we are cautiously optimistic that as the situation in Japan stabilizes and they are able to get back into production. That we'll start seeing delivery to local dealers, sometime in the September-October time frame which bodes pretty well for additional advertising from the likes of Toyota, Hyundai, Kia and so forth. So I think that once they get the units in the lot that we'll see an influx of import advertising. And I'd like to believe that that will also incentives GM and Ford to step up there efforts as well.
Barry Lucas - Gabelli & Company
Just shifting gears, investments in whatever software required for digital delivery to cab, which run the mobile devices, when you were talking about corporate performance, is that pretty much over with?
Yes, Barry, it is. While we expensed the vast majority of those development cost in '11, we know called those out as we move into '12. And we actually start generating some revenue through the e-readers, albeit small revenue. Those expenses will now be going against will be treated as a cost of good sold against the revenue.
Barry Lucas - Gabelli & Company
Okay, and now just expanding on that and looking at the various comments, financial publications about Apple in particular. How do you see that relationship evolving? How do you keep control over the customer? How do you deal with 30% agency model?
So Tom, knowing that you're in the middle of some sensitive negotiations, I think he'll be the best one to answer that sort of an update on where we are.
Yes, so we launched with Apple through iTunes. We're selling single-copy sale for three of our brands, Better Homes, Parents and Fitness and that is been ongoing for the last few months, starting in the fourth quarter of fiscal '11. We are in deep negotiations and discussions with Apple about selling subscriptions through iTunes. And that is ongoing and we're feeling very, very positive about that.
Some of our competitors have already done that and made those announcements. But when we look to the future we're very excited. It's very, very early stages for the tablets. But we're excited about the model because we're able to save the cost associated with producing a physical product.
So when we start building our models and looking to the future depending a lot on consumer demand. We feel confident that even by paying Apple, agency fee. We have worked out some of the discussions about getting the client information that we can have a positive business model going forward and actually improve our margins.
Barry Lucas - Gabelli & Company
Tom you just answered the follow-up question. So you think that as you eliminate the cost associated with physical production and paying a fairly high commission to Apple you can control the customer information and deliver higher margins?
Yes, its early stages on the model that we're building. But as of today and things can change and evolve. But as we look at it today, we feel confident about that.
Barry Lucas - Gabelli & Company
Okay. I don't want to get too snarky here, particularly in an uncertain stock market environment. But the stock had a new roll. You increased the dividend last year. You started buying back stock again, and that doesn't seem to have helped very much in terms of delivering value on a per share basis, if you will.
So what do you're thinking about going forward since the things that you've done up to now don't seem to have had too much of material effect. Are there anything's that you would consider do differently?
And I don't think it's snarky in any way, shape or form, because I think we're all aligned and incented the same way to focus on increasing shareholder value. I think you're aware that we're having some research done to better understand some views from the marketplace. But I think more importantly understanding that probably it would be good if we made a stronger messaging around just how extremely strong our cash flow generation prospects and capabilities are.
And then looking at how we carefully balance that with increasing the amount of cash that we return to our shareholders over time between the dividend and the share repurchase program but also making sure that we have the flexibility required to do some things such as (inaudible) that we have the opportunity to do a few years ago, that have further increased that cash flow generation capability over the time. And we're obviously very serious about that. And will be into meaningful conversation about that with our Board the week after next.
Well, we thank you all for participating today. Joe and Mike Lowell and I, are certainly available for the balance of the day and of course tomorrow. If there are follow-on questions and conversations don't hesitate to reach out. Thank you very much.
Ladies and gentlemen, this conference will be available for reply after 1 pm Eastern standard time today to August 11, 2011 at mid night. You may access AT&T Executive replay system at anytime by dialing 1800-475-6701 and answering the access code 209-316. International participants may dial 320-365-3844. Those number again 1800-475-6701 and 320-365-3844 and the access code again is 209-316.
That does conclude our conference for today. Thank you for your participation and for using AT&T Executive TeleConference. You may now disconnect.
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