Dow Jones & Company Q3 2007 Earnings Call Transcript

Dow Jones & Company, Inc. (DJ)

Q3 2007 Earnings Call

October 18, 2007 10:00 am ET

Executives

Mark Donohue - Director, Investor Relations

Rich Zannino - Chief Executive Officer

L. Gordon Crovitz - Exec. Vice President; President, Consumer Media Group, and Publisher of The Wall Street Journal

Analysts

Paul Ginocchio - Deutsche Bank

John Janedis - Wachovia Securities

Scott Davis - J.P. Morgan

Presentation

Operator

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

Mark Donohue

Thanks, Claudia. Good morning. Welcome to our third quarter 2007 earnings conference call and webcast at www.dowjones.com. On this morning’s call, we have with us Rich Zannino, our Chief Executive Officer; Bill Plummer, our Chief Financial Officer; Gordon Crovitz, President, Consumer Media and Publisher of The Wall Street Journal; Clare Hart, President, Enterprise Media Group; and John Wilcox, President of the Community Media Group. All will be available to take any questions you may have.

A transcript of today’s prepared remarks will be on our website shortly after the call and should you have any questions after the call, please feel free to call us at Investor Relations at 609-520-5660.

Our discussion today will include certain forward-looking statements and actual results may differ from those presented here. Factors that could cause such a difference are outlined in our SEC filings and on our website. Reconciliation into the non-GAAP financial measures disclosed today are available in our earnings release, which is available on the investor relations page of our website at www.dowjones.com.

With that, it’s a pleasure to turn the call over to Rich Zannino.

Rich Zannino

Thanks, Mark. Good morning all, and thanks for joining us for this brief, and likely last, quarterly earnings call.

My comments this morning will focus on our very strong and industry-bucking third quarter and year-to-date 2007 results, putting them in the context of the transformation plan we embarked on in early 2006.

For the past 20 months or so, we’ve been winning in this new media environment by urgently transforming Dow Jones from a company heavily reliant on newspaper publishing to a more content-driven and diversified media company.

We’re well on our way to achieving our goal of being the world’s best provider of high quality business and related content across all consumer and enterprise media channels. And in the process, we’re creating significant value for our shareholders, customers and employees.

Our third-quarter operating results are the latest evidence that our plan is working. Revenue was up 20% over last year, operating income before special items was up 170% and our $0.27 of EPS before special items was up 145%, which was well ahead of the $0.22 Street consensus.

This marks the seventh consecutive quarter where we’ve posted double-digit percentage gains in operating income before special items. This momentum is reflected in our 2007 year-to-date results, where revenue was up 18%, operating income before special items was up 70%, operating margin before special items was up 290 basis points, and EPS before special items was up 48%.

We’ll continue to build on this momentum in the fourth quarter as we see another strong performance at EMG, we see print advertising trends improving at the Journal, and we see online advertising revenue growth returning to the 20% range.

As a result, for the full year of 2007, we expect to post EPS before special items in excess of 40% over last year, which is above the top end of the guidance range we gave back in January.

And we expect the beat to go on in 2008. We’re in the process of building our 2008 budgets and on a standalone basis, we’re targeting EPS of about $2 per share which would be another very healthy double digit year-over-year earnings gain.

We see this as a pretty impressive performance on an absolute basis. It is even more impressive when you put it in the context of the earnings declines amongst our peer group and consider that we are still deriving about 55% of our revenue from secularly challenged newspaper markets, down from 67% last year. This performance is being driven by the bold moves included in our transformation plan, which are paying off.

In our Consumer Media Group, we’ve strengthened the print Journal by substantially upgrading its management team. This team is making the most out of the tripling of the Journal’s color capacity, the addition of Weekend Edition, and the redesign of the paper to be even more relevant and profitable in this digital age.

We’re using this new and stronger print platform to significantly increase circulation profitability. We’ve grown truly paid circulation and increased circulation revenue for eight consecutive quarters, all while reducing our circulation marketing costs.

We’ve been constantly upgrading our ad sales team, ad packages and go-to-market strategies and tactics, which is enabling us to defend our dominant market share in traditional ad categories and take substantial new share in emerging new categories, most notably consumer advertising. This effort to take share in consumer advertising will be enhanced with the launch next year of our high-end consumer magazine.

We’ve also reduced the annual run rate of printing, production and delivery costs of the Journal by some $35 million over the past couple of years and most importantly, we’re improving the quality of our news coverage, our stock in trade, as evidenced by the two Pulitzers, including the most prestigious Gold Medal for Public Service that the Journal won in 2007.

At the same time, we’ve been significantly investing in our non-print consumer businesses. We’ve built the Online Journal into the world’s largest paid news site. We’ve further bolstered our position on the Web with the acquisition of MarketWatch and the launch of a separately paid Barron’s Web site and will do so again with the joint venture with Interactive Corp. to form a new personal finance website, which will launch later this year. Also at Barron’s, we’ve entered the conference business in a multimillion-dollar way, and launched the Barron’s 400 index.

Internationally, we’ve substantially improved our bottom line by fusing together our print and online operations and converting the European and Asian editions of the Journal to less expensive, more reader-friendly compact formats and by acquiring VWD and eFinancialNews.

As I said, these moves are paying off. Year-to-date, we’ve increased Consumer Media Group operating income by $30 million on a 1.3% increase in revenue. For the third quarter, revenue was up 2.5% and the bottom line was better by $14 million.

Third-quarter revenue growth was driven by an 8% increase in print and online circulation and other revenue, an 8% increase in online ad revenue, and a 13% gain in international ad revenue, which includes EFN.

Partially offsetting these gains was a 2.9% decline in Journal print advertising revenue. We posted gains in B2B, financial, consumer and auto advertising. Unfortunately, these gains were more than offset by very weak technology advertising revenue.

At our online properties, ad revenue grew 8% and again, we expect to see our growth ramp back up to the 20% range online in the fourth quarter. Our online subscription revenue was up 12% in the third quarter, as paid online Journal subs were up over 25% to 989,000. Our average monthly unique visitors were up nearly 20% to about 17 million in the quarter, with page views up an even greater 34% to 383 million pages.

At our Enterprise Media Group, we continue to post very strong revenue, profit and margin gains and we’re rapidly creating a powerful platform to fuel our future growth. We brought in a highly talented new management team and restructured the business. We acquired and integrated Factiva and Alternative Investor Group.

We’ve continually invested in our indexes businesses, which is helping drive explosive growth in revenue, profit and enterprise value there. We’re innovating with new technology and new products, such as our Private Equity Deal Database that goes into beta in Q4 this year, the enhancement of role-based applications such as Factiva SalesWorks and Insight, and Newswires’ Wealth Manager and very high potential suite of algorithmic trading products.

These moves are also paying off. So far this year, revenue at Enterprise Media Group is up 80% and profits are up 55%, or $42 million. For the third quarter, we boosted EMG revenue by 80% and profits by 59%, or $16 million. If we include Factiva in both periods, third quarter revenue at EMG was up 6% and we posted a 40% profit gain.

Another key to our profit improvement for the quarter was our cost control. We’ve reinvested much of these savings into faster-growing initiatives and dropped the rest to the bottom line. While on the surface, our third-quarter operating expenses before special items increased 13%, when you dig deeper, you see that this number included 17% growth due to our recent acquisitions. So on a comparable year-over-year basis, expenses actually declined by about 4% in the third quarter.

Likewise, if you look at it on a year-to-date basis, our operating expenses before special items increased 14%, and this included about 16% from acquisitions, which leaves us with a 2% decline in comparable expenses for the year-to-date period.

We’re benefiting this year from the $65 million in cost savings identified in 2006, as well as another $55 million identified this year, as well as the $20 million in Factiva integration cost savings this year.

Our Local Media Group’s third quarter performance continues to reflect industry-wide challenges. Revenue was down 6% on a 9% decline in ad revenue, partially offset by 4% growth in circ and other revenue.

Advertising remained weak in the quarter, especially in the Northeast where we generate about 70% of our community newspaper revenue.

Operating expenses at LMG declined 3.6% in the quarter, but this was not enough to offset the revenue decline and therefore, operating income declined by about $2 million or 13%.

Our growth this year proves that we are no longer solely dependent on print advertising at the Journal to drive our total company growth. By continuing to strengthen, leverage and exploit the assets of the print Journal and our other print businesses, we can continue to fuel growth in faster-growing channels which will propel our overall growth. These assets include our unique brands, indispensable content, attractive audiences, deep customer relationships and powerful marketing platforms. This is what our transformation plan is all about and the plan is working.

We are not the wounded and malnourished media dinosaur that many in the press have recently portrayed us to be. On the contrary, our financial, operating and journalistic performance over the past 20 months is proof that today we are a fast-growing, thriving and vibrant company: one positioned for a very bright future.

We have industry-leading brands, content, businesses, products, people and potential. Customers old and new are using us in ever-increasing ways and numbers. News Corp. sought us out for these reasons. Their acquisition of us, which we expect to close in December, creates enormous value for our shareholders, customers and employees. It will further accelerate our growth and ensure the longevity and prosperity of Dow Jones and the Journal for many years to come, which will provide yet more value to our customers and employees and News Corp. shareholders.

Before opening it up for questions, given that this is likely our last earnings call, I’d like to extend my thanks and best wishes to all of those on the Street -- investors, analysts and others -- that have supported Dow Jones. I’d especially like to thank those of you who have stuck with us as we’ve charted our new course in these challenging times for our industry. I hope that your patience has been duly rewarded.

And with that, we’ll turn it back to Claudia and open up the phone for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is coming from Paul Ginocchio with Deutsche Bank. Please state your question.

Paul Ginocchio - Deutsche Bank

Just a question; what sort of is left to happen to close the deal? Are there any other milestones that we should be looking for? Thanks.

Rich Zannino

We filed the amended proxy statement last night and responded to the SEC comments. They will take another look at that and then we’ll reply to any additional comments they may have. We’ll set the record date. We’ll set the shareholder meeting and then we’ll have the vote, and we should be done. Those are the major steps.

Paul Ginocchio - Deutsche Bank

Congratulations on the good results on the ’08 outlook. Good luck with News Corp.

Operator

(Operator Instructions) Our next question is coming from John Janedis with Wachovia Securities. Please state your question.

John Janedis - Wachovia Securities

Thank you. Congratulations and best of luck, guys. One just quick question, if I could; based on the terms of the trends, maybe for Gordon, if he’s there, I think on the call in the second quarter, you mentioned that you thought you would see a pick-up in online advertising. I’m wondering if you can give us an update there, just given what you saw in print in the third quarter. Thanks.

L. Gordon Crovitz

Thank you, John. I am here.

Rich Zannino

I think he’s here for the 40th consecutive earnings call, so --

L. Gordon Crovitz

And very glad to be here. Just generally, in online advertising, as Rich said, we were up 8%. We’ll be up 20% next quarter and finish the year, as we said, in the mid to high double digits. We were kind of flat in tech because of communications advertising. Other categories of tech were nicely up and we continue to see a trend away from less targeted media toward a more targeted media, especially in the technology category.

John Janedis - Wachovia Securities

Thank you.

Operator

Our next question is coming from Scott Davis with J.P. Morgan. Please state your question.

Scott Davis - J.P. Morgan

Good morning. I guess my question is with Rupert suggesting that -- particularly that he’s going to make the WallStreetJournal.com free, and it’s unclear if that’s the right decision or wrong decision, and only time will tell. This might be a good time for you to just review, or maybe you could just refresh my memory for -- when you were deciding this and looking at it time and again, I’m sure, over the past couple of years, what were the factors that made you conclude that you had the right strategy? Just so we can contrast the strategy going forward.

Rich Zannino

I’ll make a couple of points and then Gordon will dive into it, but I think first, what Rupert Murdoch has said is that he wants to take a hard look at our online business model and that’s what we’ve done consistently over the year. And what we have today is pretty much a hybrid model where across the Journal digital network, which includes the Journal and Barron’s and our verticals, in the quarter, in the third quarter we averaged about 17 million uniques. As you know, we have roughly a million paid subs, so you can see how much traffic we are getting from “free” visitors, or visitors who aren’t paying on a monthly basis.

So we have a hybrid model today where we have free and paid across the network. Even when you strip out MarketWatch, the online Journal in the third quarter had about 10 million unique visitors. Again, we have a million paying, so you can see that people are taking advantage of the free features of our site.

So as we’ve looked at the model over the years and again, we do constantly look at it, we have felt that for this moment in time, that we have had the right model. Times change and things change and the online space is rapidly evolving, as everyone knows, and people’s consumption on the web is rapidly changing and evolving, as everyone knows. And it is up to us to continue to evolve ourselves to keep pace and stay ahead and continue to be the number one business news and financial information source on the web.

Our interests are entirely aligned with News Corp.’s interest on that score, and so we’re going to spend some time here digging even deeper, perhaps, than we’ve dug in the past into looking at the model, and we are going to do that together with News Corp. and Rupert, and we’ll come to a logical conclusion, with the objective being to have the Wall Street Journal be the biggest and the best website for business and financial news on the world wide web, and to do that in a way that maximizes and optimizes the monetization of our audience over the long-term.

That’s kind of the theory of what we’re doing and Gordon can jump in with some of the particulars in terms of the economics of the various models, et cetera.

L. Gordon Crovitz

To just add a little bit of color to what Rich said, in the 10, 11 years of the online Journal, our goal has been obviously to create a successful business model and as we look at the model, we do this from a position of unique strength in the online world, where lo and among news media companies, we’ve built an enormously successful subscription business online. As we said, we will soon hit a million paying subscribers to the online Journal. Barron’s Online, at well over 100,000, is now the second-largest subscription news site in the world, thus surpassing the Financial Times.

So we’ve known with the online journal that we’ve had the best business site. We think we’ve had the best business model for it. The opportunity and the challenge now is can we be both the best and the largest? And at 10 million uniques for the online Journal, obviously a million of those subscribers, we’re on our way but we’re not the biggest.

So is there a way to continue to expand our audience while maximizing the profitability of our online operations? We think there are some interesting opportunities to do that but I think it is important as outsiders look at our model, to understand that for many years now, we’ve had a hybrid model where most of our unique users, even before the acquisition of MarketWatch, have been to open content, even as we’ve had very fast-growing number of subscribers to the online Journal.

So we’ve had the best of both worlds. We’re now very focused on how do we also be the largest source of business and financial news online.

Scott Davis - J.P. Morgan

That’s helpful. Best of luck.

Operator

(Operator Instructions) It appears we have no further questions. I would like to turn the floor back over to management for any closing comments.

Rich Zannino

Thanks, Claudia, and thank you all for joining us this morning. Thanks, again. Bye-bye.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. We thank you for your participation.

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