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Dow Jones & Company, Inc. (DJ)

Q1 2007 Earnings Call

April 17, 2007 10:00 am ET

Executives

Mark Donohue - Director, Investor Relations

Richard Zannino - Chief Executive Officer, Director

Bill Plummer - Chief Financial Officer, Executive Vice President

Gordon Crovitz - Executive Vice President, President, Consumer Media Group, and Publisher of The Wall Street Journal

Clare Hart - Executive Vice President and President, Dow Jones Enterprise Media Group

Analysts

John Janedis - Wachovia Securities

Paul Ginocchio - Deutsche Bank

Alexia Quadrani - Bear Stearns

Craig Huber - Lehman Brothers

William Bird - Citigroup

Fred Searby - JP Morgan

Steven Barlow - Prudential Equity Group

Lisa Monaco - Morgan Stanley

Karl Choi - Merrill Lynch

Peter Appert - Goldman Sachs

Ed Atorino - Benchmark

Presentation

Operator

Greetings, ladies and gentlemen and welcome to the Dow Jones first quarter 2007 earnings conference call. (Operator Instructions) It is now my pleasure to introduce your host, Mr. Mark Donohue, director of Investor Relations for Dow Jones & Company. Thank you, Mr. Donohue, you may begin.

Mark Donohue

Thank you. Good morning, welcome to our first quarter 2007 earnings conference call and webcast at www.dowjones.com. On this morning's call we have Richard Zannino, our CEO; Bill Plummer, our CFO; Gordon Crovitz, President, Consumer Media and Publisher of the Wall Street Journal; Clare Hart, President Enterprise Media Group; and John Wilcox, President of Local Media Group. All will be available to take any questions you may have.

A transcript of today's prepared remarks will be on our web site shortly after the call. Should you have any questions after the call, please feel free to telephone Investor Relations at 609-520-5060.

Our discussion today will include certain forward-looking statements. Actual results may differ from those presented here. Factors that could cause such a difference are outlined in our SEC filings and on our web site. Reconciliations of non-GAAP financial measures disclosed today are available in our earnings release, which is available on the Investor Relations page of our web site.

With that, I am pleased to turn the call over to Rich Zannino.

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Rich Zannino

Thanks, Mark. Good morning all, and thanks for joining us. I’ll kick it off this morning by discussing our much improved first quarter results. I’ll also cover the steps we took in the quarter as we continued to retool our business models to position us to win in this new media environment. Bill will follow with details on our financial results. Then we’ll open it up for questions.

Our first quarter 2007 results were solid: revenue was up 18%; operating income was up 104%; operating margin was up 320 basis points to 7.5%; and EPS came in at 24 cents per share, up 71% over last year. These results are the latest indication that the transformation we embarked on in early 2006 is working. Our highly profitable growth was driven by investments we’ve made in our digital and B2B media businesses combined with aggressive cost cutting.

More specifically, it was driven by 30% ad revenue growth at Dow Jones Online, the successful integration of Factiva (which added 3 cents of EPS in the quarter), a 32% jump in revenue at our Indexes business, 12% growth at Financial Information Services, 66% growth in internet revenue at Local Media, and a full quarter’s benefit from $65 million in cost reductions we began implementing in 2006. All of this combined to more than offset a 2% decline in ad revenue at the US print Journal and a 25% decline in operating income at Local Media.

The aim of our transformation plan is to transform Dow Jones from a company heavily dependent on print revenue to a more diversified content-driven consumer and enterprise media company meeting the needs of its customers across all consumer and enterprise media channels; to attract more customers and encourage them to use us across all media channels; to diversify our reliance on unpredictable print revenue with investments in digital and B2B media; to smartly manage our costs; and to generate superior value for our customers and shareholders.

On this last point, our total return to shareholders in 2006 was 10% - which outpaced most competitors. So far this year, our stock is down. Thus, while we’re making solid progress, we know there is more work to be done. As Bill will elaborate, we posted profit gains at every one of our major business units with the exception of Local Media in the quarter. We drove these short term results while also focusing on creating sustainable long term growth by executing our five-plank transformation plan. We’ve made much progress on this plan, including in the first quarter.

The critical first plank is to put in place the right organizational structure and people. Last year, we installed a new structure focused on franchises, customers and markets. We strengthened our leadership team with the additions of Clare Hart, Bill Plummer and Ann Sarnoff and by putting Gordon Crovitz in charge of CMG and John Wilcox over LMG. They in turn have strengthened their teams. We continued to strengthen and diversify our leadership team in the first quarter of 2007 with the additions of Jorge Figueredo to head human resources and Linda Dunbar to guide our communications efforts. We also decentralized our information technology operations to better align technology with the businesses it serves.

Our second plank is to execute successfully on our existing slate of bold innovations. In September 2005, we launched Weekend Edition. Today, Weekend Edition is pleasing readers and, as Bill will elaborate in his remarks, grew nicely in the first quarter and is helping drive outsized gains in our consumer advertising.

On January 2nd of this year, we launched a redesigned print Journal aimed at being more relevant to print readers and advertisers in this digital age. This is a key part of our strategy to encourage customers to use our offerings across all channels of distribution. Reaction from readers and advertisers continues to be positive. The redesign paid dividends in the first quarter. It reduced Journal newsprint costs by about $5 million and will save about $20 million for the full year 2007. Simultaneously, we also launched a free online Markets Data Center which is driving increased traffic and ad inventory to the Online Journal.

The team has been driving execution on MarketWatch and many other online initiatives. Ad revenue at Dow Jones Online was up 30% in the first quarter. The repositioning of our international print and online operations has improved the bottom line there by over $18 million per year and set the stage for stronger revenue - revenue was up 12% in the first quarter. In February, we launched a new Journal brand campaign with the tagline: Every Journey needs a Journal. This $15 million print and online campaign is helping sustain the improved circulation results Bill will touch upon.

The third plank requires that we continue to generate funds to fuel growth by smartly managing expenses and increasing investment capacity. Our first quarter 2007 results were significantly improved because of the $65 million of annualized costs reductions put into play in 2006. We’ll continue to look for additional opportunities to manage our cost base and find fuel for growth.

The fourth plank is to execute our new strategic plan.

The fifth-- and perhaps most important -- plank is to seek new bold innovations to fuel our continued growth and momentum. In the first quarter, we successfully began integrating Factiva. This will increase our Enterprise Media Group revenues by nearly $300 million, or 75%. It will create a strong platform for profitable growth in the attractive B2B market. We created Dow Jones Content Technology Solutions, which combines Factiva, Dow Jones Newswires and Dow Jones Licensing Services, to get the full range of anticipated product, technology and revenue and cost synergies. This integration improved EPS by 3 cents in the first quarter and we’re on track to meet or beat our 11 cent full year accretion target.

We also entered a joint venture with Interactive Corp. in the first quarter to form a new, Web 2.0-oriented, personal finance internet site aimed at a broad consumer market. The partnership will combine the marketing, distribution, internet savvy and entrepreneurialism of IAC with the brands, content and marketing platforms of The Wall Street Journal, MarketWatch and other Dow Jones products to create a place where consumers can learn, interact and make the most of their financial resources. We expect the startup of this venture to be about 3 cents dilutive to our 2007 EPS.

Just last week we announced the acquisition of eFinancialNews, a diversified media company serving the European financial services community with fast-growing print, online, training and events businesses. eFN has a well-developed presence in the attractive, $10 billion U.K. print and online advertising market and will add scale, market expertise, content, and solid cash flow to enhance the growth and profitability of our European business. eFN will also add successful digital and other non-print businesses to help diversify our reliance on traditional print revenue. We expect eFN to be 3 to 5 cents accretive to EPS in 2008, and have no impact on EPS this year.

Of course, differentiated and indispensable content is at the heart of all we do. On this score, we’re very pleased to have won two Pulitzer Prizes yesterday, including the very prestigious Gold Medal for Public Service for our options backdating coverage. On a slightly less prolific score, we’re just as proud to have eight of our news colleagues recently named to the ‘30 under 30’ list of the best younger business journalists.

So while transformation is in full force and effect and many things are changing at Dow Jones, the primacy of our journalism is not and will not. We’re off to a strong start in achieving our full year 2007 outlook of earnings growth in the 25 to 40% range. We know we must do more to build on this momentum, and we will.

Bill Plummer

Thanks, Rich and good morning everyone. This morning, I’ll provide some additional background on our financial results. As Rich noted, we grew our revenue 18%, operating income before special items 104% and EPS before special items 71% in the first quarter. On a pro forma basis, assuming Factiva was owned in both periods, revenue increased 3% and operating income before special items increased 84%. We posted profit gains at every one of our major business units with the exception of Local Media in the quarter, as we successfully execute our transformation plan.

In addition to the revenue gains Rich mentioned, a key driver of our profit improvement was further realization on the $65 million of expense initiatives that we implemented last year. On a pro forma basis, total expenses declined about 1% due to lower marketing expense, as well as reduced compensation, newsprint and print delivery costs resulting from our restructuring, outsourcing and other initiatives.

Moving onto our segment results, at Consumer Media Group, first quarter revenue increased 2% on a 2% gain in advertising revenue driven by a 30% increase in online advertising revenue at Dow Jones Online, a 10% increase in international advertising revenue, and a 12% increase at Barron’s. These gains were partially offset by a 2% decline in ad revenue at the domestic Wall Street Journal, which continues to operate in a challenging advertising environment.

Circulation and other revenue was up 1% on gains at both the print and online editions of the Journal. Expenses at CMG declined almost 2% due to lower marketing, newsprint, depreciation, technology and print delivery costs, partially offset by increased investment spending at DJO. Together, this led to a $10 million increase in operating income in the quarter as this critically important segment returned to profitability from a $2.4 million loss last year. Operating margin also improved significantly, up 360 basis points to 2.7%. Flow through was an impressive 202%.

Dow Jones Online was a significant contributor to CMG’s positive first quarter performance. Total revenue grew a better-than-expected 18% in the quarter, on a 30% increase in advertising revenue led by strong growth at both the Online Journal and at MarketWatch. Some of the strong advertising categories included finance, business services, media, consumer, auto and retail. We also continue to experience healthy levels of online circulation revenue growth, up 13% in the first quarter. Paid subs to the Online Journal were up 20% to 931,000 driven in part by the success of an offer for new subscribers to receive both the print and Online Journal.

As we noted this morning in our earnings release, we changed our methodology for counting online paid subscribers to the Online Journal. The circulation count now includes both online-only subscribers and print-online bundled subscribers who have paid and registered at the Online Journal. Under the previous methodology, we didn’t count these bundled subscribers because we did not yet have knowledge of their usage. Using the previous methodology, paid subscribers to the Online Journal were still up a strong 9%.

We also posted strong subscriber growth at Barron’s Online, which launched as a separate site in January 2006, growing 49% in the first quarter to 88,000 paid subs. The repositioning of the Journal editions in Europe and Asia continue to generate better than expected top line and bottom line results. Total international media revenue was up 12% driven by a 10% gain in advertising revenue. Despite an almost 50% improvement in operating results in the seasonally light first quarter, we posted a modest loss internationally, primarily due to losses in Europe.

We announced on Friday, that we will be acquiring eFinancial News. eFN will profitably enhance our European operations and add successful digital and other non-print businesses to help diversify our reliance on traditional print revenue. In 2006, eFinancial News posted revenue growth of 31% and EBITDA growth of 90%. For 2007, we are forecasting revenue growth of 21% and EBITDA growth of 26%, with strong growth in subsequent years as well.

We paid net cash of ₤26.1 million, subject to a working capital adjustment. Including cost synergies, this represents 10.1 times 2007 estimated EBITDA of ₤2.6 million. That multiple declines to the mid single digits when measured against our forecast for 2008. All-in, we expect eFN will be neutral to EPS in 2007 and to contribute 3 to 5 cents of accretion in 2008.

At the domestic print Journal, advertising revenue declined about 2% on a 3.1% decline in volume. We’re obviously disappointed that our string of 6 consecutive quarters of ad revenue growth has been broken. We’re only modestly comforted by the fact that we were up against an 18% comp last year, and that we posted a very strong performance in Weekend Edition, and that we increased our ad yield, and that we increased our print market share again in the quarter. Given that we face a 12% comp in the 2nd quarter, we will have to continue to drive those kinds of improvements to build on the growth we have already delivered.

Within the categories, technology and auto advertising, two of our largest categories, remained challenging in the quarter, declining 16% and 27%, respectively. The technology decline was mainly driven by a sharp drop in communications which was only partially offset by gains in other tech revenue. Classified was down 8% as declines in residential real estate and recruitment more than offset gains in commercial real estate and legal advertising.

Partially offsetting this weakness were healthy gains in financial and consumer advertising. Financial advertising revenue continues to post positive gains, up 8% in the quarter, while our consumer push continues to pay dividends, with consumer up 16%, and a very strong 47% if we exclude the depressed auto category. This strong consumer growth was led by the travel, luxury and media & entertainment sub-categories.

We have also seen growing interest in free-standing inserts among our advertisers. And color continues to grow nicely, posting a 16% increase in color revenue for the quarter, as many advertisers continue to pay a premium to tap the benefits of color advertising. As a reminder, we’re adding another 4 pages of color capacity which will come on line in January 2009.

We continued to see positive advertising results for Weekend Edition in the first quarter. Weekend Edition ad revenue was up 36% as a number of initiatives to drive Weekend sales, including special sections, advertorials, and new pricing programs, ad positions and content adjacencies are beginning to gain traction. Consumer advertisers continue to be attracted to Weekend Edition with about 70% of Weekend Edition advertising in the B-to-C category.

We continued to grow the most valuable measures of print circulation against trends which remain challenging in the industry. Our individually paid circulation numbers – the best measure of truly paid circulation as it counts only those subs paying at least 25% of basic price – continued to grow. In the September 2006 ABC period, our individually paid circulation was up 9%. We expect to continue this positive trend. We will be reporting a 3% increase in individually paid circulation and flat total circulation based on our filing for the March ABC period.

This performance is driven by a revitalization of our circulation efforts which includes new professional marketing leadership, talent, tools and techniques, including more aggressive circulation marketing and promotional activities such as our $99 bundle, which is driving significant increases in POL usage. Our circulation profitability is up sharply as a result of these efforts, which are driving increased circulation revenue with lower circulation expenses.

Within our Enterprise Media Group, the positive revenue and profit momentum we saw throughout 2006 continued in the first quarter of 2007. Total revenue increased almost 79% and operating income increased 47%. This was driven by the acquisition of Factiva and increases at Dow Jones Indexes, Dow Jones Financial Information Services and Newswires. On a pro forma basis, assuming we owned Factiva in the first quarter last year, total EMG revenue was up 5%, operating income improved 31% and operating margin improved 390 basis points to 19.9%. We tightly managed expenses, which were basically flat on a pro forma basis.

Content Technology Solutions revenue increased 103%, almost 3% on a pro-forma basis, driven by growth in subscription revenue and new initiatives. Our Indexes and other business segment posted a strong revenue quarter, up 17% driven mainly by an increase in assets under management that use our indexes, and by growth in advertising and database revenue within our Financial Information Services Group.

During the quarter, we made significant progress on the integration of Factiva and we are already benefiting from a number of the expense synergies we identified. As a reminder, we originally forecasted 2007 expense synergies at $15 million, increasing to $19 million in 2008. These savings are largely the result of cost savings in corporate functions, back office and operational systems. We will exceed these 2007 cost synergy forecasts and have already implemented 80% of these savings. The improved savings in 2007 will increase 2008 savings expectations as well.

Some of these excess savings will be reinvested in client facing activities and others will be dropped to the bottom line. For example, we will invest additional funds in sales training and in sales and marketing efforts to accelerate the realization of revenue synergies. But, we’re also taking some to the bottom line as evidenced by our current estimate for Factiva to be accretive to DJ EPS in 2007 by 11 cents per share, well up from our original estimate of 3 to 5 cents per share.

Our Local Media Group’s first quarter performance continues to reflect industry-wide challenges. Revenue was down 3.5% on a 5% decrease in ad revenue, while circulation and other revenue was flat for the quarter. Ad linage remained weak, especially in the northeast where we generate about 70% of our revenue. Total ad volume declined 8.7% and was only partially offset by a 66% increase in internet ad revenue as the internet initiative embarked upon last year continues to drive big gains. Operating expenses declined almost 1% as we continued to aggressively manage expenses in response to the environment through actions such as shutting down non-daily products that do not produce acceptable profitability. Unfortunately, the revenue decline more than offset this expense management, resulting in an operating income decline of about $2 million, or 25%, to $5 million and a margin decline of 260 basis points to 8.9%.

Now let me spend just a second on some other key figures. Our total newsprint costs were down about 19% for the quarter, driven by approximately $5 million in savings from the web-width reduction and a 3% decline in price. The average cost per ton declined as newsprint prices began falling $15 to $20 in January. Price has since stabilized, but we expect an additional modest price decline in the second quarter before stabilizing through the summer.

Equity earnings, which are now reported on a net-of-tax basis, declined about $300 thousand due to the acquisition of Factiva and a decline at SmartMoney, partially offset by a gain at Stoxx.

Interest expense increased slightly in the first quarter primarily due to significantly higher commercial paper rates. Debt stands at $508 million, up from $447 million at the end of 2006, driven by the first quarter timing of annual incentive compensation and pension payments.

Capital expenditures totaled $12 million in the quarter compared to $10 million last year.

In conclusion, we’re pleased with our strong start to 2007. While it’s still early in the year, our first quarter results are consistent with our annual expectations. We are hopeful that the many initiatives, such as our newly revamped print Journal, our attractive and growing online products, our revitalized ad sales and circulation approach, our realigned and stronger EMG group and our tight expense management, will continue to propel our earnings and share growth for the full year 2007.

With that, I will turn it over to Mark and we’ll open it up for questions.

Mark Donohue

You can open it up for questions, please.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from John Janedis - Wachovia Securities.

John Janedis - Wachovia Securities

Thank you, good morning. Cost controls for the consumer business were clearly very strong during the quarter. Can you talk about your average for incremental margins this year?

And then on the print Journal side, it looks like 1Q was a little bit below plan, and I am wondering if you can give us an early look on second quarter trends? Thanks.

Richard Zannino

Why don’t we take the second part of your question first, John. We are up against very difficult comps, as you know, an 18% comp from last year in the first quarter and a 12% comp here in the second quarter. That adversely affected our first quarter ad revenue. We think we will do a bit better than that in the second quarter, but I think it will keep our second quarter ad revenue a bit below our original expectations as well.

Fortunately, we have been able to offset that softness with strength in other areas across the Dow Jones portfolio.

Gordon Crovitz

A little bit more color there. Last quarter, as Rich said, last year was up 12%. The categories – finance, consumer, and general business – were all up in the 20% range. So to be flat or slightly up in Q2 this year we think is really not bad in this environment. Maybe a little bit more detail on that.

Tech, which includes telecom for us, probably will continue to decline in Q2. General business ought to be up in the strong mid-single-digits. Financial had a really strong quarter last year, that will probably be flat. Auto will still be pretty challenged. The consumer category, which is up well over 40% this quarter will continue in that range, we think. Next quarter in classifieds is a bit tough, so in this environment we think that is a pretty strong forecast for Q2.

Bill Plummer

John, on the question on margins, you saw the very solid flow through at CMG in the first quarter where we basically flowed through 200% of our revenue, meaning our operating income increased by twice what our revenue increased. That was driven obviously by cost control and the web width reduction as part of the redesign of the Journal. For the quarter, operating margins were up about 360 basis points. For the year, they ought to be up in that range as well.

Operator

Your next question comes from Paul Ginocchio - Deutsche Bank.

Paul Ginocchio - Deutsche Bank

Thanks. A question about the circulation revenues, it looks like it is relatively flat, up slightly here in the first quarter and it was sort of similar to that in the fourth quarter after some mid-single-digit revenue growth through the first three quarters of ’06. Can you just talk about what is going on there, particularly with the growth, are you just trying to basically get that volume growth?

Richard Zannino

We are overall pretty happy with our circulation revenue. At the print Journal, we are very happy with it; at the online Journal as well, because we have some, which is something most people can’t say. We are particularly pleased in print that we have been able to increase the number of paying subscribers that we have to the print Journal, and that we have been able to increase revenue overall from those paying subscribers.

It slowed down a bit in the fourth quarter, it was actually down a little bit in the fourth quarter. We are back up slightly here in the first quarter and we think we will see continued gains throughout the year. We’ve got a bit of a barbell strategy going on where we’ve raised subscription rates to $249 for core subscribers, and that increased circulation revenue for us. On the flip side of that, we have this $99 bundled offer, print/online bundled offer, for new subscribers as we bring new subs into the Journal franchise and encourage them to use us in print and online. For the most part, those $99 bundled subs are replacing very low revenue-generating subscribers and we are able to attract those subscribers at a lower acquisition cost.

The net effect of all of this is we have increased circulation revenue, we have reduced circulation marketing costs, net we have increased circulation profitability. Even more importantly, we attracted about 80,000 additional subscribers to the online Journal as a result of this offer. In other words, people that are coming in and taking the bundled offer and registering and using the online Journal. So it is right in the sweet spot of our strategy, which is to encourage people to use us across all channels of distribution. This offer certainly drives people to do that, so we are very happy with it.

Gordon Crovitz

Paul, maybe just to give you a little bit of guidance in terms of circulation since you raised that issue, we just filed our March ABC statement which is going to show the Journal is going to grow overall by about 0.5%. But most importantly, we are going to continue to grow our individually paid category, up over 3% from a year ago. That is the third straight reporting period where we have shown an increase in individually paid.

As Rich said, that increase in individually paid translates directly into better economics in terms of our circulation economics. Circulation sales expense are down about 25%, a little bit more, versus a year ago, partly driven by the print/online offer for new subscribers. This also means we have had an increase in revenue at the print Journal, seven of the last eight quarters. We are obviously very happy about that.

So the ABC statement, when it comes out, I encourage everyone to take a look at the overall numbers, but especially to look at that individually paid category, where our number will be about 1.4 million, well above anybody else in the field.

Operator

Your next question comes from Alexia Quadrani - Bear Stearns.

Alexia Quadrani - Bear Stearns

Are you seeing an overall healthier print ad market in Europe? Should we expect the improved results in international to continue into Q2?

Gordon Crovitz

Revenues in Europe and Asia were both up in terms of ad revenue over a year ago, about 6% and we think those trends will continue and Europe will continue to improve its performance, although as we said earlier, we are not satisfied with our performance in Europe. Asia continues to do a bit better.

Alexia Quadrani - Bear Stearns

On the local media side, there continues to be some pressures industry wide in that business. Is there anything else you can do on the cost side in order to protect profitability there going out? Also, given that there have been a fair amount of transactions lately that saw multiples for these local properties, does that encourage you maybe to sell some more of your properties?

Richard Zannino

We are going to correct Gordon’s ad revenue increase in a second here, but ad revenues internationally were up 10%, not the 6% that Gordon reference.

Gordon Crovitz

Europe was up just a little over 3% of that total.

Richard Zannino

On the local media group question, I will take the back half and then John will take the front half of your question. We’ve said in the past that we like the cash flow from the local media properties, we like the stability of that to the portfolio. The properties that we have left at local media group are very strong properties in very strong markets, places like Cape Cod, Massachusetts, Stockton, California, Medford, Oregon, Middletown, New York. So very strong markets, so it is a very strong portfolio in terms of what we have left.

Our intention is to keep the portfolio. What we have said in the past though is if an investment opportunity came along that was compelling and that had a higher return on investment than the return we’d get from the local media properties, then we would consider selling additional local media properties. Our attitude remains the same when it comes to local media and the place of local media in the Dow Jones portfolio. With that, I will turn it over to John who will talk a little bit about what more we are doing on the cost side there.

John Wilcox

Sure. We are about $1.5 million in the hole right now, which is a hole but it is one we can climb out of. We are attacking it, certainly with expense control, eliminating through attrition, through consolidation, through buyouts; positions which don’t add to our growth model. We are going to be outsourcing some positions to Manila.

It is important to note that we are avoiding expense reductions related to the development of new products and services, because at the same time we are reducing expenses we are looking at new revenue streams, including magazines, direct mail, contract printing, delivery, B2B services, our local search and Internet sites. We have just launched an initiative called [Autoway] Next, where all of our locations are vying for $1 million in seed money to launch new initiatives. We believe between the revenue streams coming online and the expense control measures I mentioned, along with some additional savings in health care, pension and process improvement in our business offices, that we are going to be able to equal or exceed last year’s operating income.

Richard Zannino

When John says we are starting off in a $1.5 million hole, he is referring to operating income this year versus last year in the first quarter, so the focus is on making that up here over the next three quarters.

Operator

Your next question comes from Craig Huber - Lehman Brothers.

Craig Huber - Lehman Brothers

Good morning. Your press release from three months ago, for the full year, you were expecting print Wall Street Journal in the U.S. ad revenues up 4% to 6%. I do recall on the conference call you thought it would be up 3% to 4% for the year. If you could update investors if your full year expectations have changed on that, given what has happened in the first three to four months?

Richard Zannino

I think, Craig, as we always say, it is hard to call a quarter at a time, let alone call for the whole year. We are looking forward to the back half of the year when comps ease considerably. We would hope to deliver that mid-single-digit range for the back half of the year. I think the second quarter will be lower than that.

Bill Plummer

And just a little bit of color there, Q3 last year was up 0.3% and Q4 was up 5% so the comps are coming down considerably, which helps gives us some confidence that in the second half we will be up in the mid-single-digits.

Richard Zannino

And there are significant initiatives underway to drive that as well, as we’ve talked in the past, in terms of driving that performance.

Craig Huber - Lehman Brothers

Rich, when you said earlier that you thought for the second quarter that you thought your print Wall Street Journal would be flat to slightly up for the second quarter, at this stage, a few weeks into the quarter, you have about a 50% visibility on the advertising volume for print for the full quarter, at this stage?

Richard Zannino

A little more than that.

Craig Huber - Lehman Brothers

Can you update us on your thoughts for your cash costs pro forma percent change for the full year? Do you expect to be down, call it 2% for the full year?

Richard Zannino

When you say cash costs, are you excluding depreciation?

Craig Huber - Lehman Brothers

Exactly.

Richard Zannino

We will come back to that later in the call.

Craig Huber - Lehman Brothers

Just a pro forma number.

Richard Zannino

We will come back to that.

Operator

Your next question comes from William Bird – Citigroup.

William Bird – Citigroup

Can you discuss your thoughts on acquisitions or alliances to drive more value online? Second, what kind of year-over-year ad pricing growth are you seeing online right now? Thanks.

Richard Zannino

We will start with the first part of your question in terms of acquisitions. We are most focused in looking at acquisitions in the digital arena, as well as the B2B arena. I think you asked specifically about online acquisitions, which of course would fall into the digital side. We are looking at a number of opportunities that are out there and are for sale. We are being disciplined in our approach in looking at those. It has got to be strategically right, financially attractive. The way we define financially attractive is you have to have a return on investment on a risk adjusted basis that exceeds our cost of capital, and you have to do that using reasonably conservative projections. We also look for deals to be accretive to our earnings in the first full year after their acquisition and we look to pay reasonable multiples of earnings in acquisitions. The third criteria is manageable execution risk.

When you put those three criteria together and you talk about digital media properties, some of the pure play online models are going for huge prices. So I think it would be more likely that you would see us play in this area with companies like eFN, where they have a strong component of online, but the multiple is much more reasonable and realistic.

Likewise in the case of B2B media properties. They're generally nicely growing with nice profit margins. We now have a platform at EMG that is large enough to absorb acquisitions, so I think you'll see us be a bit more active there. Again, always sticking to our criteria of strategically right, financially attractive, and manageable execution risk.

Gordon Crovitz

Bill, to your question on yield at Dow Jones Online, yield is really an important measure for us. It was up 16% for the quarter in terms of our display advertising. We do have some new remnant programs, including for some new remnant providers online, that if you include those new sources of revenue, which include search and text links, the yield obviously would have been down. What we look at is the display ads, the traditional advertising that's up 16%. A lot of that is driven by behavioral targeting, which takes advantage of the added scale that we have across the entire network, MarketWatch, plus the online Journal, plus Barron's Online.

Rich Zannino

I would just add to that, for Bill and others, when we talk about remnant space, we're basically selling space that heretofore went unsold. So even though it's sold at a relatively low yield, it's generating revenue dollars for us and we're selling inventory that we haven't been selling in the past. So as Gordon says, when you look at apples-to-apples comparisons of our display inventory, yield is up nicely there and then we're generating additional revenue dollars by selling some of this other inventory on a remnant basis.

William Bird - Citigroup

Rich, was there anything in particular that drove the positive swing in Wall Street Journal ad yields in March?

Gordon Crovitz

One of the big factors was the increase in color. The color penetration was up to about 55% versus 54% last year. It was 50% two years ago, so we're making good progress. There's also a lot of growth in premium color positions, you'll see half page color ads, the premium there over black and white could be up to 30%.

Classified revenue declined as a percentage of the total, so that obviously drove yield up. We expect yield to continue to rise in the second quarter, as color advertising continues to grow and display continues to grow as a percentage of the total.

Operator

Our next question is from Fred Searby – JP Morgan.

Fred Searby - JP Morgan

From a big picture, if you look at it, you have been loathe, Rich, to really raise the dividend or really buy back shares after the debt you took on with MarketWatch. But it looks like your EBITDA should be up 35%, 40% at least. Conservatively, you do look like you have a very manageable debt load. What are your thoughts on raising the dividend or starting some share buyback at some point this year?

Secondly, just big picture, you've got easier comps and you're up 71%. I think your guidance, off the top of my head, is 25% to 40% for the year, and it looks like some of the drivers, you're not going to lap them. What should we think about in why that looks pretty conservative, given this quarter? Thanks.

Bill Plummer

I'll take the last part of it first, Fred. The first quarter, a 71% increase in EPS before special items and 104% are doubling of operating income is benefiting from a couple of things, which will make it likely be the highest quarter of year-over-year income gains.

The first thing is it has a full quarter's benefit of our cost reductions in the first quarter of this year. We started on that cost reduction program last year in the middle of the first quarter and it escalated over the course of a year, kind of culminating, if you will, with the $20 million a year we saved when we reduced the web width at the Journal. We get a full quarter benefit of the cost reductions this year over a quarter last year, where we had just started the cutting. So that's one issue.

The second issue is, the first quarter is seasonally our second-lightest quarter, so it's a relatively low earnings quarter. A $1 gain year-over-year on the first quarter shows up as a very high percentage year-over-year gain. That's just a little explanation of the 71% math compared to the 25% to 40% reaffirmation of the guidance we gave at the beginning of the year.

We're not changing our guidance. It's really too early to call the rest of the year. We're very happy with the way we started the year off, being able to overcome a modest decline in print Journal revenue and to put up pretty healthy improvement in the first quarter. We're going to take it a quarter at a time here. We're not changing our guidance.

On the questions on use of cash flow, our first priority in terms of using our cash flow would be to make high return on investments back into our business, as we continue to look for bold ideas and bold ways to continue transforming our portfolio. So at this point, we're keeping our powder dry to be able to do that. If an increase in our dividend or if share repurchase had a higher return on investment than those alternatives, we would increase our dividend and we would buy back stock.

So everything we do, we compare to the returns we get on those relatively riskless investments we could make, i.e., buying back stock or paying a higher dividend. Our dividend feels about right where it is. It's a pretty high yield. If you use Street estimates for earnings this year, it's still a 50% to 70% payout ratio. That's pretty high when you compare our yield and our payout ratio to the peer groups and to others out there. The dividend feels about right where it is.

Fred Searby - JP Morgan

I'm saying your debt level should be about 1.5 times debt to EBITDA, which doesn't sound too demanding. It does sound like there's some leeway beyond using your free cash flow to make accretive acquisitions, but to actually think about maybe increasing your debt level and buying back some stock opportunistically; that was the question.

Rich Zannino

I'll just go back, I don't want to repeat myself, but I'll go back to what I said. Our first priority right now is to look for high-returning investment opportunities where we can plow some money back into the business, and again help reduce our reliance on traditional print revenue.

Bill Plummer

Just to go back on the question around cash costs that Bill Bird asked earlier. Bill, if you exclude newsprint, cash costs should be about flat. That would be consistent with the guidance that we gave earlier.

Operator

Our next question is from Steven Barlow - Prudential Equity.

Steven Barlow - Prudential Equity

Can you help us out a little bit on the print delivery run rate in terms of expenses for the year? At the same time, on a run rate for the year, the equity income line, please.

Rich Zannino

What we said at the beginning of the year in our guidance for equity income would be about $9 million to $10 million for the year.

Steven Barlow - Prudential Equity

That's net of tax?

Rich Zannino

That's net of tax, but before the InterActiveCorp JV dilution, which we said would be about $0.03, so call it $2.5 million net of tax for that. So that would put us in the $7 million to $8 million range for equity earnings for the year.

Can you talk a little bit more what you mean by the run rate of print delivery?

Steven Barlow - Prudential Equity

Basically, you've gotten rid of the Ottaway costs here and, frankly, it's difficult to figure out all your cost elements by looking at your pro forma numbers from last year. I was too high on the print delivery number and just curious what your run rate is going to be for the year.

Gordon Crovitz

There's print delivery being a significant part of our cost base, will be down modestly year-on-year a couple of percent for CMG.

Rich Zannino

For LMG, John? Up a percent or two?

John Wilcox

Yes, approximately.

Rich Zannino

So flat at CMG and up a percent or two at LMG.

Steven Barlow - Prudential Equity

Bill, with the acquisition of eFN here, will that end up having the second quarter having your highest debt level for the year? What would that be? Secondly, did you actually make a cash pension payment?

Bill Plummer

On eFN, the financing plan for eFN includes some low notes that the sellers may take, and includes using some cash that we have got on the balance sheet currently and maybe a little bit of borrowing to fill out the total of $26.1 million net of cash. So we won't see a significant increase in total debt associated with the eFN acquisition as our operating cash flow should ramp back up in the second quarter. I wouldn't put any incremental debt based on the eFN acquisition into any of your models for the remainder of the year.

The second question was what, again?

Steven Barlow - Prudential Equity

Did you make a cash pension payment? It sounded like you did when you were mentioning expenses earlier.

Rich Zannino

Bill mentioned a cash pension payment, but it was really a cash payment to our retirement plan, so not pension in the traditional sense. We have defined contribution plans, for the most part, and we make a contribution to those in the first quarter.

Steven Barlow - Prudential Equity

So that's nothing unusual?

Rich Zannino

No. Ottaway has a defined benefit plan, but we haven't made a cash contribution to that this year.

Steven Barlow - Prudential Equity

You mentioned some of your organizational changes. I know in the fall that Judy Barry has left on the ad side. Has that area of ad sales has all been redone? And is there a new head of ad sales in?

Rich Zannino

Judy left in early March, so not in the fall. I think she worked through the first week of March or so.

Gordon Crovitz

We're interviewing a number of very qualified candidates and hope to fill that position quite soon.

Rich Zannino

Those are internal and external candidates.

Operator

Our next question is from Lisa Monaco - Morgan Stanley.

Lisa Monaco - Morgan Stanley

I just wondered if you could isolate Factiva's pro forma revenue growth? I realize there's a lot of ins and outs there. Secondly, is there any way to quantify for the U.S. media ad revenue growth within Consumer Media, the ad revenue line, what percentage of that is online? Thanks.

Clare Hart

The Factiva revenue growth was about 6%, as we expected in the first quarter.

Gordon Crovitz

I think you can get to that number if we say that about 13% of CMG revenues were online, it will help you get there.

Operator

Our next question is from Karl Choi - Merrill Lynch.

Karl Choi - Merrill Lynch

Hi, good morning. A couple questions here. I wonder if you could quantify the percentage of advertising revenues in The Wall Street Journal that were from the consumer category? Second, I know you sometimes offer lower rates to consumer advertisers. On a blended basis, is there a way to look at the advertising rates that you charged for the general category, how does that compare with the rates that you charge for financial?

Rich Zannino

Karl, first of all, congratulations.

Karl Choi - Merrill Lynch

Thank you.

Rich Zannino

Consumer advertising in the first quarter was about 28% of our total ad revenue at the Journal. It's interesting, though. If you take the residential real estate, that excludes classified and excludes financial. If you say that residential real estate is consumer advertising and financial retail, if you call that consumer advertising, consumer would be up around 45% of our total revenue. If you use the traditional definition of consumer, it's 28%. If you use the more expanded definition of consumer, it's close to 50%.

I think the second part of your question was about consumer rates relative to financial rates?

Karl Choi - Merrill Lynch

That and presumably a lot of that is included in the general categories. I'm trying to figure out the rate differential between general and financial at this point, and also trying to dig a little bit deeper into the March performance, in terms of advertising yield.

Rich Zannino

Yes. Well, the financial advertising as a general matter is our highest-yielding advertising category, because of the tombstone advertising that's in there. So financial will be our highest-yielding advertising. General advertising is a mix of B2B, which is also very high yielding, and consumer. As you point out, some of consumer advertising is done at a category rate, which is 28% off of our full rate. But even with that going on, we've been able to increase our ad yield.

As Gordon mentioned, it was driven by mix, with classified being low yield and being down, and financial being high yield and being up, that definitely helps our mix. Color premium definitely helps our mix. A full-page color ad sells at about a 35% premium to black and white. A half page of color sells at like a 45% premium to black and white. So as we sell more half pages relative to full pages, it helps our yield. We'd of course rather sell a full page of color advertising, because the dollar value of a full page is much higher than the dollar value of a half page. As soon as you put color on a page, you use that bit of capacity. So if it's got one dot of color on the page, you've used up one of our 20 pages of color capacity.

That's why we said in the past we don't want to get too carried away with yield, because you can't spend yield, you can only spend revenue. Hopefully, that's helpful.

Karl Choi - Merrill Lynch

That's helpful. Last question. On the Weekend Edition, you previously mentioned that you had expected the Weekend Edition to be a few pennies dilutive in 2007, given the strong start in the year. Any update on that forecast?

Rich Zannino

No, that's still our forecast.

Operator

Our next question is from Pete Appert - Goldman Sachs.

Peter Appert - Goldman Sachs

Excellent work on the cost side, gentlemen. Bill or Rich, I am wondering if specifically you could talk a little bit more about what was happening in marketing costs? You cite that as an item where you're seeing some benefit. Can you quantify how important that was? Does it represent a strategy change in terms of how you're thinking about promoting the business?

Gordon Crovitz

Peter, in terms of consumer marketing, this is driving more circulation to the online Journal, the print Journal. When we combined structurally last year, one of the big opportunities that we saw was to be able to drive down the acquisition cost for incremental new print subscribers significantly. That 26% decline in marketing costs year over year, driven largely on the most successful offer in the market, which for new subscribers is to get the print and online Journals together. That's obviously very much part of our strategy. We think the best way to access the franchise is print and online together. We've now gone, from last year, one in five print subscribers having access to the online Journal, now one in three have access to the online Journal.

This is, I think, a very encouraging sign that we're increasing circulation revenues and significantly decreasing marketing expense while keeping ABC circulation flat, as I indicated, even up a little bit, and growing the individually paid category of subscribers.

So in a world where very few papers, maybe no other newspapers are showing healthy increases in the individually paid category, we do think this is one of the many areas in which the Journal franchise really does stand out in this environment. So we're able to increase individually paid, able to maintain ABC, and to do it with more than 25% decline in consumer marketing expense.

Rich Zannino

Peter, the idea here is that these $99 bundles come up for renewal, that we're stepping them up. They're just now starting to come up for renewal, because we started this program earlier last year. We've got various tests in the market, in terms of how much we can step them up upon renewal. The idea is to bring them into the franchise using print and online and as they develop loyalty to the franchise, to raise the price over a couple of years to the full subscription price.

Peter Appert - Goldman Sachs

I'm sorry, the 26% decline in marketing costs, was that the first quarter on a year-to-year basis?

Bill Plummer

Yes, for the print Journal.

Peter Appert - Goldman Sachs

Expanding on Karl's question, on the profitability of the Weekend Journal, do you think it's realistic to think that based on the momentum you're seeing currently and what you're doing on the cost side, that you can get to profitability in '08 for the Weekend Journal?

Rich Zannino

We'll see how the rest of this year goes, but that's what we're driving towards.

Gordon Crovitz

We had about a 35%, 36% increase in revenue in Weekend Edition, so that was encouraging. But we'll have to see how it goes.

Operator

Your final question is from Ed Atorino - Benchmark.

Ed Atorino - Benchmark

Can you talk about your insert program a little bit? Is this something that you're going to expand? Are you looking at any other sort of special advertising positions that could generate premium dollars, like the front page one?

Rich Zannino

Sure. On the freestanding inserts, we absolutely intend to do more of that going forward. We have successfully tested it and we don't do it with equipment, we do it with human beings, in terms of doing the inserting. Ottaway does it with machines, but the Journal can't afford to. So the paper boys are inserting them. It's working very, very well, generated seven figures of revenue for us in the first quarter, with plans to accelerate it going forward.

It's not a freestanding insert the way you're thinking about it, but the other big opportunity we have is Weekend Edition, generally, is a three-section paper and we have four sections of press capacity. So more and more, you'll be seeing us adding a fourth section, either a special report or an advertorial or maybe an insert to Weekend Edition to generate incremental revenue there in Weekend. So that sort of falls between your categories of an insert and creating new ad positions.

I'll let Gordon answer the question on whether or not we've got anymore front pages to offer for sale, in terms of premium ad positions.

Gordon Crovitz

I'm not going to take the bait and indicate we have only one ad for section front.

Rich Zannino

We are sold out through 2007 on each section front.

Ed Atorino - Benchmark

Are these freestanding-type things presold to some degree?

Rich Zannino

Sure.

Gordon Crovitz

Yes. And just on the inserts, we're now able to deliver to 1 million of our subscribers, that's up from about 600,000 last year. We had almost $1 million of insert revenue in the first quarter, about 40% of that was in Weekend Edition. You might have noticed the beautiful ads from Brooks Brothers, and I'm sure you ordered some shirts and of course, from Porsche.

As Rich mentioned, beyond the inserts and focusing on Weekend Edition, we'll have 12 journal reports, those are the news-driven special sections in Weekend Edition in 2007. We didn't have any last year. We'll have a number of special advertising sections also, covering topics that really are perfect for Weekend Edition like travel, consumer electronics, and wealth management.

Rich Zannino

Thank you, everybody, for your time. Talk to you next quarter.

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