Dow Jones Q4 2005 Earnings Conference Call Transcript (DJ)

Dow Jones & Company Inc. (DJ)
Q4 2005 Earnings Conference Call
January 26th 2006, 10:00 AM.

Executives:

Mark Donahue, Investor Relations
Peter Kann, Chief Executive Officer
Chris Vieth, Chief Financial Officer
Rich Zannino, Chief Operating Officer
Gordon Crowvitz, Senior Vice President

Analysts:

John Janedis, Banc of America Securities
Steven Barlow, Prudential Equity Group
Peter Appert, Goldman Sachs
Lauren Fine, Merrill Lynch
Dave Lewis, JP Morgan
Christa Quarles, Thomas Weisel Partners
Dave Clark, Deutsche Bank
Douglas Arthur, Morgan Stanley
Craig Huber, Lehman Brothers

Presentation

Operator

Welcome to the Dow Jones & Company fourth quarter fiscal year 2005 earnings conference call. Operator Instructions It is now my pleasure to introduce your host, Mr. Mark Donahue, Director of Investor Relations for Dow Jones & Company. Thank you, Mr. Donahue. You may begin.

Mark Donahue, Investor Relations

Thank you. Good morning. Welcome to our fourth quarter 2005 earnings conference call and webcast at www.dowjones.com. On this morning's call, Peter Kann, Dow Jones' Chairman, Chief Executive Officer, will touch very briefly on some highlights of the fourth quarter; Chris Vieth, our Chief Financial Officer, will take you through the financial results; and then Rich Zannino, our Chief Operating Officer, will elaborate with operating highlights and our forward outlook. Also on the call is Gordon Crowvitz, Senior Vice President of Dow Jones and President, Electronic Publishing. All will be available to take any questions you may have. For your benefit, a transcript of today's prepared marks will be on our website shortly after the conclusion of this call. Also, this teleconference call will be available by replay starting at 12 p.m. Eastern time today and ending at 11:59 p.m. on February 3rd. To access the audio replay, please call 877-660-6853 and enter our account number 286 and confirmation number 183899.

Finally, should you have any questions after the call, please feel free to telephone Investor Relations at 609-520-5660. As we begin our call, I may remind you that we'll make certain forward-looking statements in an effort to assist you in understanding the Company and its results. Actual results may materially differ from those presented here. Additional information concerning risk factors that could cause such a difference can be found in the Company's documents filed with the Securities and Exchange Commission from time to time. Reconciliation of non-GAAP financial measures disclosed during this call are available in our earnings release, which is available on the Investor Relations page of our web site at www.dowjones.com.

With that, it is a pleasure to turn our call over to Peter Kann.

Peter Kann, Chief Executive Officer

Thank you, Mark, and thank you all for joining us this morning. Very briefly, our fourth quarter earnings result, that is, before special items of $0.41 per diluted share, was down slightly from the $0.43 per diluted share earned in the year earlier fourth quarter. That said, we were pleased to see improvement during the quarter in "Wall Street Journal" ad linage, resulting in upward revision to our earlier guidance of low to mid $0.30 per share. At Print Publishing, we posted improved ad revenue at both domestic and international editions of the Journal, and that, of course, was driven by positive ad linage increases each month of the quarter. We continue to be pleased with the performance of our electronic publishing businesses in the quarter, with each posting revenue and profit gains. However, those positive results were not quite enough to offset higher newsprint marketing and other costs, in addition to planned spending relating to the launch of the Journal's new "Weekend Edition" and also Ottaway's internet initiative. Chris and Rich will review those results in some detail shortly.

As we begin a new year at Dow Jones, my colleagues and I look back on 2005 as a year of bold initiatives, major strategic investments, and sound operational enhancements. Indeed, the year, I think, saw more positive change and more exciting innovation at this company than any that I can recall, from the acquisition of "MarketWatch" to the launch of "Weekend Edition;" from the repositioning of our international editions to the Ottaway internet initiative I mentioned before; from the announced redesign of the Journal to significantly accelerated print online integration, I believe we have set the stage for a future profitable growth.

In closing, as previously announced, Rich Zannino is going to assume the CEO role and responsibilities next Wednesday. All units and functions of the Company are going to report to Rich. He will report to the Dow Jones Board of which I will remain Chairman until April 2007. I believe Rich has your full confidence and he certainly will have my full support and that of the Dow Jones team as he leads this company forward. I assume this is the last time I'll be participating in these calls. So I just want to close by thanking all of you for your thoughtful analysis and also, on occasion, your constructive criticism over these past 15 years that I have had the privilege of serving as CEO. And with that, I'm going to turn it over to Chris for a financial review.

Chris Vieth, Chief Financial Officer

Thank you, Peter, and good morning, everyone. This morning I'll provide some additional background on our fourth quarter and full-year financial results which we reported earlier today. Building on Peter's comments, we closed the fourth quarter 2005 with some nice momentum in Journal advertising, which drove EPS above our original expectations to $0.41 per share, before special items, compared with $0.43 last year and $0.40 at first call. During the quarter we recorded special items netting to a gain of $0.08 per share as a special gain of $0.11 related to favorable resolution of federal tax matters as offset by a charge of $0.02 per share for restructuring at Factiva and $0.01 for accretion of discount on a contract guarantee obligation.

For the year, total revenue increased 6% to $1.8 billion, and earnings per share before special items from $0.98, compared with $1.21 in 2004, as profit increases at electronic publishing were not enough to offset print advertising revenue declines and "Weekend Edition" spending at print publishing and investment spending at Ottaway. Turning to our operating results, total company revenue was up 10% in the quarter to $482 million, driven by the acquisition of "MarketWatch" and a 5% gain at print publishing along with continued strong organic growth at consumer electronic publishing and indexes, and solid gains at Newswires. Fourth quarter operating expenses increased about 14% to $433 million. "MarketWatch" expenses represented roughly 4% of the increase, and "Weekend Edition" accounted for about 5%, with 2% for increased newsprint and severance costs and all other expenses up about 3.5% to last year.

We ended the quarter 2% above our 12% total expense growth guidance, roughly $7.5 million in the quarter. This was made up of $3 million for severance, with $2 million for print delivery and volume variable expenses, $1 million of increased circulation-marketing, and $1 million for higher incentive expenses. For the year, total expenses were up 9%, with about 5% related to spending for "MarketWatch," 3% for "Weekend Edition" and newsprint, leaving other expenses up less than 1% to last year as we continued to control costs across the portfolio, investing savings of print publishing into growth initiatives at our other two operating segments.

Fourth quarter operating income declined $9 million to $50 million, and operating margin was 10.3% versus 13.4% last year. For the full year, operating margins were 7.5% versus 9.9% in 2004. For the quarter, excluding the $2.1 million restructuring at Factiva, pretax equity income was $9 million versus about $1 million last year, driven by the elimination of international television losses, as well as improvement at Factiva, STOXX, and "Smart Money", which more than offset reduced equity earnings resulting from the sale of SUSI. For the year, equity earnings increased nearly seven-fold to $16 million.

Net interest expense increased $4 million in the fourth quarter and was up $15 million for the year on increased debt levels associated with borrowings to fund the "MarketWatch" acquisition and higher interest rates. For special items, our effective tax rate was 37.4% in the quarter and 38.4% for the year, versus last year's rate of 39.7, driven by the benefit of the deduction for domestic production under the American Job Creation Act plus elimination of FF SUSI, which was subject to a 65% effective tax rate. We're planning for a tax rate of 39% for 2006.

Looking at some other key figures, our fourth quarter ending head count totalled about 7,500 and was flat with last year's fourth quarter, excluding employees associated with acquisitions. Total newsprint costs in the quarter were up roughly 22% with consumption of about 6%, and our average cost per ton up about 15%, with the increase in prices reflecting the $25 per-ton increase pushed through in the quarter, along with a catch-up on buying around of price increase in the fourth quarter of 2004. We finished the year with newsprint expenses up 10% on a 2% decline in consumption and a 12% increase in prices. For 2006, we're budgeting for a 12% increase in average prices.

Capital expenditures total $27 million in the quarter, for a full year total of about $65 million versus $76 million last year. In 2006, we're planning capital spending at $100 million, with $33 million of the increase directed to configure our 19 presses to a 48-inch web width. In addition to some exciting content and format improvements, this project will launch in January 2007 and will generate P&L savings of more than $18 million per year. Appreciation and amortization totaled $28 million for the quarter and was up about $3 million for the year to $108 million, with higher expense from acquisitions at electronic publishing and initiatives at Ottaway offset by reduced depreciation on lowered capital spending at print publishing. In 2006, stock option expensing will cost us about $0.04 per share ,or about a penny a quarter.

And lastly, our balance sheet and cash flow were strong, and we closed the quarter with a cash balance of $11 million and debt of $472 million, versus a debt level of $511 million at the end of last quarter. We began the year with $146 million of debt and incurred $439 million to fund the "MarketWatch" acquisition. During the year, we generated $58 million of excess cash flow after capital investments, dividends, and all other outflows, which we combine with $48 million of proceeds from asset dispositions and $7 million in cash to reduce our debt balance by about $113 million. Our absolute debt levels are still a bit higher than we would like, particularly given the currently depressed levels of print publishing advertising revenue, and as such we're planning to direct our excess cash flow in 2006 to further debt reduction.

And with that, I'll turn it over to Rich.

Rich Zannino, Chief Operating Officer

Thanks, Chris. Good morning, all, and thanks for joining us. We're pleased to see the beginnings of a payback on our efforts to overcome this difficult print advertising environment. We're tightly controlling costs, improving quality, successfully investing in bold new initiatives, and sharpening our execution to fuel our future growth. Early evidence of this payback is found in our fourth quarter results where total revenue increased just over 10%, driven by a 9% increase in advertising revenue. While total expenses excluding special items were up 14%, this was mainly due to investments in long-term growth initiatives, mainly "MarketWatch" and "Weekend Edition," and as Chris noted, comparable expenses were up only 3.5% in the fourth quarter.

As a result, total operating income before special items declined 15%. Excluding "Weekend Edition"' dilution and the severance charge, the decline in operating income was only 4%. Adding in substantially improved equity earnings, we posted a 5% decline in EPS before special items in the fourth quarter. If we were to exclude $0.05 of dilution from "Weekend Edition," and $0.02 for the severance charge, EPS would have increased 12% in the quarter. In print publishing, total revenue in the fourth quarter was up 4.7% over 2004 on a 5.8% increase in ad revenue. Total expenses were up 15.4%.

However, this increase was driven by "Weekend Edition" expenses, which comprised 8% of the increase; increased newsprint prices, which comprise 2%; and severance expenses which comprised 1%' with all of the costs at print publishing up a more modest 5% in the quarter, which was driven mainly by higher circulation, marketing, and promotional spending, which resulted in large part from the timing of spending this year compared to last. This all netted to operating income of $4 million in print publishing, down from $26 million around last year. Bridging this drop, about $7 million was from anticipated "Weekend Edition" losses; $6 million from timing of circulation of promotion marketing spending; $3 million from severance; $4 million from higher newsprint prices; with a balance due to remaining expense growth of 2%, exceeding flat revenue growth, excluding "Weekend Edition."

During the quarter, we posted revenue growth at all editions of the Journal. We're off to a great start with "Weekend Edition," which is a success on every level, pleasing readers and advertisers and beating our bottom line expectations. We've conducted four nationwide reader surveys and reaction has been overwhelmingly positive. More than 90% of those who received "Weekend Edition" read it, and virtually all expect to continue to read future editions. They're spending an average of 51 minutes reading it, consistent with the 54-minute average weekday reading time. Nearly 60% of readers are sharing it with someone else at home, extending our readership and advertising reach. About 75% of readers agree that "Weekend Edition" helps them make more informed purchasing decisions and a majority are reading it before noon on Saturday, allowing our consumer advertisers to reach our affluent audience where they most want to reach them, at home on the weekend, and reach them before they make their weekend shopping decisions.

It is no surprise then that advertisers are best attracted to "Weekend Edition" in increasing numbers. More than 360 advertisers supported "Weekend Edition" in 2005, with 55% of them new to the Journal. About 65% of the ad revenue in "Weekend Edition" are from consumer ads, and only about 35% of it is shifting from the weekday editions of the Journal Financially, for the full year 2005, "Weekend Edition" was dilutive to EPS by about $0.11 per share, better than our original expectations for dilution of $.15per share. Beyond "Weekend Edition," for the third consecutive quarter we increased circulation revenue at the Journal, and for the second consecutive quarter we increased advertising linage. In the fourth quarter, we posted an 8.1% gain in linage, with increases in each month capped by a 17% increase in December.

Looking at the Journal's key advertising categories in the fourth quarter, all categories were up with the exception of finance financial, where linage was down 14.9% on declines in wholesale and retail advertising partially offset by an increase in tombstone advertising. At this time, it looks like the trend here will improve in the first quarter, with linage about flat and revenue up slightly in our financial category. Technology linage was up 3.2% in the fourth quarter as strong gains in office products and communications advertising were partially offset by declines in hardware and software ads. We're expecting tech linage in revenue to be up again in the first quarter. In the Journal's general advertising category, which includes both B2B and consumer advertising, linage was up 12.5% in the third quarter. We posted a 46% increase in general B2B advertising due to increased insurance, professional services, corporate, and media advertising. We expect general B2B advertising to be positive again in the first quarter 2006.

The Journal's consumer ad linage was down 2% in the fourth quarter due to a decline in our auto category, partially offset by gains in travel and luxury goods advertising. We expect to post a gain in consumer advertising in the first quarter of 2006 as the auto category strengthens. In classified linage in the quarter, the Journal posted a 22% gain driven by continued strong increases in real estate. We've had a great run here, but expect to see these gains moderate to the low-single digit range in the first quarter as residential real estate advertising softens. While this will dampen our overall linage gains, the impact on revenue will be muted as our classified real estate ad prices are the lowest of any of our advertising categories. Color advertising pages were up 23% in the quarter, and color premium revenue increased 37%. However, the heavy mix of these lower-yielding classified ads resulted in the 2.5% decline in overall advertising yield at the Journal.

As mentioned earlier, our focus in 2006 will be less on driving increases in yield, as we've done for the past two years, and more on driving increases in revenue. Price matters to our clients, and with our 80-plus percent profit margin on incremental ad revenue, we have many opportunities to profitably capture market share by focusing on relative price value with our clients. For the full year, Journal linage was down 7/10 of a percent; financial advertising linage was down 14.9%; tech was down 8.1%; and consumer was down 5.8%, while general B2B was up 13.2% and classified increased 12.4%. We saw an improving linage trend in each quarter of the year. While the first quarter was down 8% and the second quarter was down 6%, the third quarters was up 4% and the fourth quarter, again, was up 8%.

We're successfully reinvigorating our Journal ad, sales, and marketing team and ramping up our corporate sales efforts. This has driven the improved trend and helped the Journal take meaningful market share in both B2B and B2C print ad categories in the fourth quarter and year. In 2006, we're continuing to strengthen our ad sales efforts with increased print online selling, news sales leadership, and a new, category-focused organization structure, including an even greater emphasis on consumer advertising, a new rate card that better rewards higher spending clients, and clearer recognition of relative price elasticity and our ensuing willingness to use relative-price value as a weapon to win incremental business from the biggest spending advertisers.

Elsewhere in print publishing, at Barron's, total ad pages decreased 10% in the quarter while ad revenue declined 7%, mainly due to declines in automotive and financial advertising. Internationally, on October 17th, we launched new editions of the print Journal in Europe and Asia. These editions have been redesigned with tighter packages of global news of interest to global business readers and a more convenient, easier to read, compact format. In a bid to capture more readers and advertiser as users of both our online and print channels, we have also fused together our print and online efforts through greater content linkages and bundled subscription and ad sales offers. The repositionings should improve annual operating profits by about $17 million, mainly from reduced cost, but it is also driving increased revenue as evidenced by a 21% increase in advertising linage at these editions with ad revenue jumping by 29% in the quarter, driven by gains in general, technology, and classified advertising, modestly offset by a decline in financial advertising. We expect these gains to continue in 2006.

Moving on to electronic publishing, we had a terrific fourth quarter. Total revenue increased 33% to $134 million; operating income climbed 86% to $29 million; and operating margins increased more than 600 basis points to 22%. These gains were driven by the very successful acquisition of "MarketWatch", strong organic revenue and profit growth at consumer electronic publishing and indexes, and solid gains at Dow Jones Newswires. At Newswires, revenue was up 6% to $68 million in the quarter on gains and international and domestic operations, as well as at our Dow Jones Financial Information Services unit. Our indexes ventures business again posted a solid revenue gain in the fourth quarter up 21% to $18 million, driven by continued strong growth in assets underlying many of our indexes. At Consumer Electronic Publishing, fourth quarter revenue increased 117% due to the acquisition of "MarketWatch," together with very strong organic revenue growth at the online Journal. Paid subscribers to Dwj.com at the end of the fourth quarter were a record 768,000, up 8% over the fourth quarter 2004.

We're thrilled with our acquisition of "MarketWatch," and it is exceeding our expectations strategically and financially. We have recast CEP's 2004 revenues to include "MarketWatch's" 2004 publicly reported revenues. On this recast basis, CEP's online ad revenues for the fourth quarter were up 11%, and its total revenues increased 8%. For the full year, online ad revenues were up 16% and total revenues up 10%. These results reflect very strong online ad revenue gains at our legacy CEP business, and more modest revenue gains at "MarketWatch," which results have been dampened by integration issues including loss of key sales executives earlier in 2005, a new joint selling approach aimed at increasing "MarketWatch" ad yields, and consolidation among a number of online brokerage customers. These issues are mainly behind us, and we expect to post double-digit ad gains at both "MarketWatch" and legacy CEP in 2006. Bottom line, the combined CEP and "MarketWatch" has far exceeded our original profit expectations for the fourth quarter and full year 2005.

Before moving off of CEP, we would like to note another online success story. We set up Barron's online as a separately paid site in January 2006. Previously,, it was accessible for free through a paid subscription to Wsj.com. In just two weeks since the separation, we've generated about 45,000 paying subscribers to Barron's online, the vast majority of whom paid an incremental $20 to add it to their Wsj.com subscription, proving once again that online users will pay for valuable content, giving us yet another online revenue stream and enabling us to further monetize our very valuable Barron's brand.

At Ottaway, fourth quarter revenue was up slightly to $88 million, driven by a 1% increase in ad revenue. Linage was down 6% in the quarter as a 19% decline in auto classified could only be partially offset by a double-digit gain in real estate advertising. Operating expenses increased 4.3%, mainly due to 13% higher newsprint prices, higher employee and print delivery cost, and investments in our new Ottaway-wide internet initiative and content management system, which helped drive a 34% increase in Ottaway's internet ad revenues in the quarter. As a result, operating income declined 11% to $21 million, and margins declined 300 basis points to 23.6%. Ottaway's fourth quarter and full year performance reflect industry-wide difficulties, yet its operating margin remains among the highest in its peer group. Nonetheless, we're very committed to increasing Ottaway profits in 2006.

Looking forward, as we start 2006, the global print ad environment remains uncertain. Advertisers continue to decide their spending close to actual publication dates, making predictions difficult as ever. Looking at the first quarter 2006, we're estimating that Journal advertising linage will increase in the mid-single digit percentage range with modest gains in tech and financial advertising. Together with the full quarter of "Weekend Edition," a 2.5% increase in average ad rates, continued strong growth at CEP and mid-single digit growth at Ottaway, this implies an upper-single digit percentage increase in total revenue in the first quarter 2006. Total operating expenses will be up about 9%; however, this includes 4% for planned additional expenses for "Weekend Edition", 1% for a full quarter of "MarketWatch", 1% for a 14% increase in newsprint prices and stock option expensing.

This leaves remaining costs up only 3.5% in the first quarter of 2006 over the first quarter of 2005, rolling in $3 million more in equity income, increased interest cost due to 159 basis point increase in interest rates and a 39% tax rate, results in first quarter 2006 EPS before special items in the low teens, which is in line with consensus estimates and above last year's $0.11 per share. Before about $0.06 share per dilution and $0.01 from stock option expensing, EPS before special items would be around $0.20 per share versus last year's $0.11. For the full year, we'll continue to keep a tight lid on spending. While 2006 expenses are planned to increase about 6%, 2% of this comes from a full year of Weekend; 1% comes for the $9 million of launch costs associated with the reduction in web width at the U.S. print Journal; another 1% from a 12% increase in average newsprint prices; and stock option expensing.

That stock option expensing, as Chris noted, will cost us about $0.04 per share for the year. This would leave comparable expenses for the full year of 2006 up only 3%. This 3% increase in comparable costs comes on top of 2005's 0.9% increase in comparable cost and 2004's 0.8% increase. We feel this proves our ability to hold on to the bulk of the hard won cost reductions achieved in 2001 through 2003. And looked at another way, it means we funded well in excess of the incremental annual expense of "Weekend Edition" and "MarketWatch" with cost reductions and cost control.

In print publishing while we're not providing specific revenue guidance, we're optimistic that improvements already in place for 2006, including a full year of "Weekend Edition," continued growth in color advertising, and a resumption of consumer ad growth, together with the positive trends we saw coming out of 2005 and seen into early 2006, should drive an increase in print publishing revenue. We project total expenses in print publishing to be up mid-single digits in 2006 with about 80% of this increase coming from the full year cost of "Weekend Edition," 12% higher newsprint prices, and the launch costs associated with the reduction of web width, leaving an increase of less than 1% in print publishing cost for the full year 2006. We expect that "Weekend Edition" will be about $0.15 dilutive to EPS in 2006, which is slightly higher than the $0.11 dilution in 2005 and also slightly better than our original expectations.

In electronic publishing, we expect revenue to increase by mid- to upper-single digits as double-digit growth at CEP will be moderated by a low-single digit increase at Newswires, driving margins up to the 23% range. Expenses in EP will be up about 6% in 2006, including a full-year of cost for "MarketWatch" and investment in profitable organic growth initiatives at both CEP and indexes. At Ottaway, we're projecting revenue to increase in the mid-single digit percentage range, with expenses up a bit more due to higher newsprint prices, higher pension expenses, and investments in new growth initiatives. As a result, we expect operating income to be up slightly, and operating margins to decline to just under 23%, though, again, remaining in the top tier of the community newspaper peer group.

Below the operating line, we're projecting our equity investments to be about flat as the elimination of a full year's of losses at CNBC International is offset by a change in intercompany payments at Factiva that shifts income from Factiva to its parents, and lower profits at STOXX, which is coming off of a very, very strong 2005. Net interest expense should be about $19 million. Our effective tax rate will be about 39%, and diluted shares outstanding should average about 83.6 million. We're budgeting $100 million for capital expenditures, as Chris noted, which is up from 2005's $65 million to about $33 million for our web width reduction project, which is expected to save more than $18 million per year beginning in 2007 in operating cost. And finally, we project depreciation and amortization expense to be about $105 million, down a bit from 2005's $108 million.

In closing, I would like to say how honored and excited I am being named the next CEO of Dow Jones. Over the next few months, I'll be working with our top team and the Board to strengthen our leadership and organization structure, enhance our strategies, improve our management processes and execution, and identify and execute an even bolder slate of strategic initiatives to accelerate our revenue and profit growth, all with the aim of creating the most value for our shareholders, customers, and employees. In the meantime, please be assured that we'll continue to uphold our core values, aggressively control everything we can, invest wisely, and successfully execute on the many bold and exciting initiatives already underway.

And finally, on both a personal and professional level, I've been privileged to work with Peter Kann for the past five years. He has been a wonderful mentor, leader, and colleague, and I'm grateful he will continue as Chairman of Dow Jones. With that, we'll turn it back to Dan to open the phone lines for any questions.

Operator

Operator Instructions Our first question is coming from John Janedis of Banc of America. Please proceed with your question.

Questions & Answers

Q - John Janedis

Hi. Good morning. Thank you. Peter and Rich, just to starts, congratulations and best of luck to both of you. Can you just talk about single copy sales for the Saturday Journal? How steady have they been since the launch, and how do they compare to the weekday edition?

A - Rich Zannino

They've actually been quite steady since the launch, although, as one might expect, they're quite a bit lower than the weekday edition. A lot of copies, we have about 150,000 single copy sales Mondays through Friday, and we're running a bit under 100,000 for weekend. As you might imagine, many single copy sales are done Monday through Friday are bought by commuters on their way to work in the morning, and without that commuter traffic on Saturday, that basically explains the difference between Monday to Friday and Saturday.

Q - John Janedis

Ok, great. One other quick question. I think you kind of touched on this, but related to the Barron's product, I think you've also over the past few months increased the price of the online Journal. What kind of revenue impact are you assuming for '06?

A - Rich Zannino

John, the most significant driver of circulation revenue increase next year will be based on the significant price increase, and as that gets rolled through all of next year, we expect to continue modest growth and circulation for the online Journal next year. I would note, by the way that the net increase of 56,000 subscribers to the online Journal in 2005 was the largest calendar year increase in online Journal circulation since 2001. So, we are budgeting modest circulation volume increases, but significant revenue increases based on the price increase. And of course, the Barron's online revenue stream really should be viewed as a new incremental revenue stream now that we've separated the two products and are charging for them separately.

Q - John Janedis

Thank you.

Operator

Our next question is coming from Steven Barlow of Prudential Equity Group. Please proceed with your question.

Q - Steven Barlow

Thanks. To follow up on the domestic circulation revenue, you had fairly good numbers. Is that really all because of the weekend Journals or anything else going on that front, please?

A - Chris Vieth

Steve, I think what we're seeing in the last couple of quarters is last year's price increase burning all the way through the file. And for the first time in some time, we've been net realizing the value of the price increase; i.e, we haven't been giving it away by having to discount new acquisition copies, so we're very encouraged by that. And clearly, "Weekend Edition" is helping, because as you all know, we did not raise subscription prices by adding the sixth day of Weekend, and readers are seeing a ton of value in it and have not had to pay for that value, so that's definitely helping our acquisition and renewal rates.

Q - Steven Barlow

Are you planning a price increase in '06?

A - Chris Vieth

No.

Q - Steven Barlow

Lastly, margin goals, you mentioned, I think, was 23%, Gordon, for electronic publishing. You had a much better increase this year. You went through quickly a couple of reasons. I guess I would have thought it might be a little bit higher than that. Maybe just go over some factors, maybe they're not getting it to jump up because there is a lot of leverage in electronic businesses that you have.

A - Gordon Crowvitz

I think these are very fast-growing businesses at 23% or even the current rate, we're way at the top of our peer group in terms of operating margin. A couple of things just to keep in mind during '06, we're continuing our Dow Jones Newswire solutions initiative, this is productizing of Dow Jones Newswires. We're very optimistic about the future of that project and our ability to add a lot of value by delivering our content and context. That's going to be a very strong driver, I'm sure, for Dow Jones Newswires going forward. So there are investments that we're making in those businesses to continue the top line growth, and I think 23% margin is pretty good in that industry given the mix of products that we have there.

Q - Steven Barlow

Fair enough. Thanks.

Operator

Our next question is coming from Peter Appert of Goldman Sachs. Please proceed with your question.

Q - Peter Appert

Thanks. Gordon, the 11% pro forma ad revenue growth you saw for the consumer electronic publishing in the fourth quarter, relative to what's happening in the internet ad market it actually seems kind of light. Can you talk about that?

A - Gordon Crowvitz

Yes. I think Rich touched on this a bit. We had extremely strong, very much in line, or even maybe a bit above what you're hearing from some of our peers at the legacy business, the online Journal business…..

Q - Peter Appert

Can you be specific on that?

A - Gordon Crowvitz

No. The big issue for looking at our all-in online advertising revenue really is one category, which is the broker site category, which is very important for "MarketWatch." It's historically been by far the leading category. As you probably know, over the last 18 months there has been a lot of consolidation among discount brokers, and when that happens, they usually cut spending. That category, we think, in terms of consolidation, is now stabilized. We're seeing a lot of strong need for the remaining players to brand the new entities that they've created. We see that in our bookings already in 2006. So we're very optimistic that we're going to have very strong double-digit growth across all of our properties, "MarketWatch," online Journal, the others, in 2006.

A - Rich Zannino

Peter, I might, it's Rich, I might elaborate on Gordon's "no" to your question. It gets very, we've totally integrated the sales organizations at CEP so "MarketWatch," online Journal, Barron's online, and all of our verticals are being sold by one sales organization. So each rep reps all of those brands and sells them together. So for example, and we've been very successful in upselling "MarketWatch" clients to the online Journal, so to the extent we upsell a client from "MarketWatch" to the online Journal, who do you want to credit the revenue to? Do you want to credit it to "MarketWatch," who may have lost a bit in the upsell, or do you want to credit it to the online Journal? So we have issues like that, in terms of splitting out the revenue between "MarketWatch" and legacy CEP.

Q - Peter Appert

Sure.

A - Rich Zannino

We have similar issues on the cost side, where we've basically integrated from literally from top to bottom the cost structures, and at a certain point, the effort in keeping them separate is not worth it, because it is not how we're running the businesses. We're running the businesses on a combined basis, so we're looking at them on a combined basis. I just wanted to elaborate a little bit on why it is difficult for us to break those numbers out.

Q - Peter Appert

I understand. Do you think strong double-digit growth could imply 20%-plus in 2006?

A - Gordon Crowvitz

We expect to be at least in line with what you're seeing from the third party analysts. In terms of growth, we are seeing strong demand for online advertising.

Q - Peter Appert

Great. Last thing, Rich, the linage guidance for the first quarter of mid-single digit might imply a little bit of a deceleration from the fourth quarter. Is that meant to be the message, and is there anything specific that would drive that?

A - Rich Zannino

I don't think that's meant to be the message. We're sitting here in the third week of January, and as we've discussed on previous January conference calls, first quarter is a difficult month, quarter to predict, because the business tends to build even later in the first quarter as ad buyers finalize budgets through the month of January and release money through the month of January. So based on our best visibility right now, that's our best estimate of what's happening in the first quarter. To build a bit faster, that we can certainly do better. We don't think it is going to build any slower than that.

Q - Peter Appert

Great. Thank you.

Operator

Our next question is coming from Lauren Fine of Merrill Lynch. Please proceed with your question.

Q - Lauren Fine

Just building off of Peter's question, I guess, looking at the comparison, by your own acknowledgement, it is one of the easier comparisons. And given some of the notable big branding campaigns that have started the year, whether it is AT&T or Intel, I guess I'm surprised, also, by that guidance. It seems fairly muted. And then I have a follow-up question.

A - Rich Zannino

I don't know.

Q - Lauren Fine

Well, how is January doing? Presumably, you face the same exact issue every year in terms of the buyers of advertising with their timing of their budgets and everything else, how does January look?

A - Rich Zannino

At this point, January looks a little bit better than that quarterly guidance.

Q - Lauren Fine

Okay. And then I'm just wondering on a couple of items. There has obviously been a decline in Barron's linage, and I think you would have expected some of that with the "Weekend Edition." How is that tracking relative to your own expectation, and how is that tracking as you enter the year? And then on the community papers, given the linage decline in the revenue increase, is there a small acquisition or one that is worth mentioning that's in there that is bridging the gap between the decline in linage and the revenue gain?

A - Rich Zannino

On Barron's, we've actually only lost one client at Barrons as a result of "Weekend Edition," and that was diminimus dollars. And so it is really not "Weekend Edition" which is adversely affecting Barron's. If you look at the "Wall Street Journal" advertising linage for the fourth quarter and the full year, it was down about 15%. And if you think about the composition of Barron's advertising, it is predominantly financial advertising. So it is just hitting Barron's harder because Barron's doesn't have the diversity of its ad base. It is working on it, but it doesn't have the diversity of its ad base to offset the 15% decline. You might recall Barron's, I think it was down 25% in the third quarter, so being down 10 in the fourth is a bit of an improvement in the trend. The team at Barron's's is optimistic that they will get back posting gains again in 2006 like they did in 2004. Based on what they're seeing in the financial pipeline and also based on going after some non-endemic categories like technology and auto, and also we started a couple of conferences in 2005. We'll probably do four in 2006. And that will also help advertising as we sell sponsorships to those conferences. At Ottaway, the difference, when you go from linage to, in reconciling from linage decline to advertising revenue increase, there are really two big items; one is ad rate increases which, Ottaway has put through and managed to get to stick, and the other is preprint revenues. As you know, there has been a trend towards people pulling back on display advertising and replacing it with inserts, and so Ottaway's seeing some nice gains there. So those are, and the other piece of it would be the internet, which was up, I think we said 34% in the quarter. So that would basically be the reconciliation.

Q - Lauren Fine

That's helpful. I guess, two other really quick ones, if I could. On the cost side, you seemed to be able to pull out some of the incremental costs that you incur related to "Weekend Edition" and "MarketWatch." I'm wondering if there is a way, and I think you have actually done this in the past, to give us a sense of what the organic revenue increase could have been absent "Weekend Edition" and "MarketWatch" ? And then, the equity line, while you gave very helpful guidance, I'm just wondering if you could give us any sort of quantification of the bigger pieces of what's in there at this point on an annualized basis, or any sense of what the seasonality might be through the year?

A - Rich Zannino

I think on the equity question, we're basically saving $16 million or so by exiting CNBC International. We got half of that saved in '05, so we'll get the other half in '06. And offsetting some of that saved in '06 is a change we've made in some intercompany payments between Factiva and its parents, i.e., us and Reuters, where we're basically flowing more money back to the parents through our operating income, still well in line with market rates, so we're not doing anything that's beyond arm's length in market. But that basically, so it flows to us in operating income, mainly in the electronic publishing unit, and it reduces Factiva's earnings, which we see as a reduction in our equity income. The second item that adversely affects us is STOXX had a really, really strong year in 2005, and we're not going to anniversary that in 2006, or at least it is not in our budget to anniversary it in 2006. The third item would be we have a small, Russian joint venture that we own a third of, Vedemosti, and Vedemosti is going to make, it's actually going to put out a "Smart Money" magazine in Russian, in Russia. And so there's some start-up costs. Vedemosti is very, very profitable, very, very successful, so a natural extension is to do a business magazine, a consumer/personal finance magazine. And so they've done a license with "Smart Money," and there's some start-up costs with that. So based on all of that, I think we'll, we're projecting equity income to be flat for the year. We said it would be up $3 million, roughly, in the first quarter, so that would mean there could be some leakage in subsequent quarters, mainly in the back half the year, because that's when we got the CNBC International saves in 2005. So it would be up against those in the back half of the year.

A - Peter Kann

Right. Lauren, just reiterating what Rich said, in the first half and then down in the back half, cycle through CNBC, core revenue, excluding our estimation of "MarketWatch" revenue and "Weekend Edition" in the fourth quarter was up about 3%.

Q - Lauren Fine

Great. Thank you very much.

A - Rich Zannino

And that's a rough number for the reasons that we mentioned in the answer to Peter's question, on splitting out "MarketWatch" and legacy CEP.

Q - Lauren Fine

Thank you.

Operator

Our next question is coming from Fred Searby of JP Morgan. Please proceed with your question.

Q - Dave Lewis

Hi, it's Dave Lewis for Fred. Congratulations, Rich. Two quick questions, one is Ottaway. I know you guys have just reinvested a lot there, but with consolidation picking up in the industry, is that an asset that you guys would ever consider divesting? And two is the touch points. Can you just address the initiatives and opportunities with regards to media devices, bringing the content to other wireless devices? Thanks.

A - Rich Zannino

We're not a seller of Ottaway. Ottaway throws off substantial cash flow and we enjoy that cash flow. It helps us reinvest in future growth initiatives. It helps us pay the dividend. And at this time, Ottaway is worth way more to us to keep it than it would be to sell it. We're optimistic about the initiatives Ottaway has in the pipeline for the future, in terms of its local media, franchise extensions; in terms of the internet and some other initiatives that are going on there. So we're a keeper of Ottaway.

A - Gordon Crowvitz

Dave, just on the electronic displays I think you were asking about, our strategy is to monetize our content wherever, however, whenever people want it. And we've been engaged in all forms of new media well beyond web publishing for years, starting with the e-books and that sort of thing. We're very active in office displays. We have a Blackberry edition of the online Journal that I encourage all of you to subscribe to if you haven't yet. And we're increasingly active on cell phones, especially through our "MarketWatch" brand. I cite, for example, the launch with Verizon Wireless; they launch "MarketWatch" on-demand short content programming for its VCAST multimedia service; that's a combination of audio and video. We're very optimistic about that. It is not a huge part of our business, but it is certainly a growing part.

Q - Dave Lewis

Thank you.

Operator

Our next question is coming from Christa Quarles of Thomas Wiesel Partners. Please proceed with your question.

Q - Christa Quarles

Hi, just two questions. First, I appreciate that it is hard to unscramble the egg at CEP, but if the egg is the information you provided us suggested that "MarketWatch" was flat to down on a year-over-year basis, and it sounds like there were some issues there, they have been resolved. I was just trying to understand if they have been completely resolved, and should we see some still muted revenue growth in the first part of the year? Maybe some acceleration toward the back end of the year in 2006? And then who are you most competing with when you go in for RPs for the online side? Is it Yahoo Finance? I mean, just give us a sense of your market share in the online space as well. And then the other question is just on the CapEx side, will you be done with the reductions in '06; i.e., '07 we should see back to normalized levels? Thanks.

A - Gordon Crowvitz

Sure, Christa. I think Rich gave the reasons for the somewhat slower out of the gate ad sales at "MarketWatch" during '05. Shortly after the acquisition, we did have a lot of turnover, especially on the West Coast for "MarketWatch," and that slowed down ad sales. We were not signalling numbers quite as you've described them; but they were not growing as quickly as we would have liked and hoped. I also touched on the broker website issue, which was significant in '05 for "MarketWatch". There are a lot of reasons we're optimistic about '06. We're fully staffed. As I mentioned earlier, we think the online broker market is going to be much more stable and healthy for us. I think I might, because you may also have questions about this, to give a little bit of context to our optimism about online growth opportunities in '06, if you look at our usage statistics and statistical information that we've disclosed, you'll see that we ended '05 at about the same number of page views, just under 300 million, as we began '04. And, likewise, the number of unique visitors was flat, about 3% less than the previous year, and let me explain why that was. The way we think about these metrics is really how we think about monetizing our page views, which, in the online world, of course, is how you generate revenues. So 300 million page views, we had a lot of inventory during 2005. We were very pleased that "MarketWatch" increased its page views per user, per month, by about 18%, and its pages viewed per visit by about 15%. So as we go into 2006, given the demand that we see for online advertising, we wanted to be sure that we had enough inventory and enough growth in unique visitors. So we've just earlier this year renewed an agreement with a very large aggregator, or portal, that had lapsed during 2005. This will result in a significant pickup in traffic. And I go through all of that to help you understand how we think about it, and how optimistic we are about online advertising, including and making sure that we have more page views and more traffic to sell against in '06.

A - Rich Zannino

What we're seeing in January, it is only one month, but it is the right month in terms of being the star of the year, we are seeing "MarketWatch" online ad revenues pick way up, so even with the noise between "MarketWatch" and legacy CEP in there. So we're off to a solid start on the year, and as Gordon says, we're fully staffed. We've got some rebranding campaigns, rather than consolidations, coming up. I think to your competitive question, the online Journal and Dow Jones online network are really competing with all of the usual suspects, Yahoo Finance and CNN Money and MSN Money and so on for online ad dollars.

A - Chris Vieth

And then Christa, on CapEx, we'll have all but $4 million of the web width CapEx spent in 2006, so we'll have $4 million more in 2007, and our CapEx will drop back to that $65- to $70 million range, which has been plenty over the last several years and will be over the future for us to invest and grow the business, as well as invest in maintenance capital.

Q - Christa Quarles

That's helpful. Thank you.

Operator

Our next question is coming from Paul Ginocchio of Deutsche Bank.

Q - Dave Clark

Good morning. This is Dave Clark for Paul. A couple questions, first on yield in U.S. publishing. Rich, you mentioned that that's no longer a point of emphasis as you pursue a relative pricing strategy, but then with the, you mentioned that real estate is going to slow, and perhaps classified will go down lower in the mix, which could improve yields. If you could net those out and tell us where yields will go, roughly, in this year or this quarter, that would be great. Then second, on the 2Q conference call, you mentioned that you had engaged strategy consultants, and I was wondering if you could tell us what you learned from that engagement? Thank you.

A - Rich Zannino

Sure. On the yield question, I think we're looking at sort of a low-single digit increase in yields over the course of next year resulting from increased color growth, which, as most of you know, I think, runs at anywhere from 30% to 40% premium to black and white, depending on if it is a full page or a half page, as well as we put through a rate increase in 2006 that we think blends to about 2.5%. So we'd see those two things on the upside. Also on the upside would be the mix that you mentioned, as the mix of the lower yield in classified becomes less, that will help our overall rate. And offsetting those things may be some of the relative price value initiatives that we have. As far as your second question on the strategy consultant, I think the, I may have said this year or next year, when I meant something else, but we're in 2006 so I apologize. On the strategy consultants, they were spending quite a bit of time with the "Wall Street Journal," the U.S. "Wall Street Journal," and we learned a lot in those exercises. A lot of the price elasticity work that I reference in my comments and that you've heard us talk about out came out of that work; the web width reduction came out of that work; a redesign of the "Wall Street Journal," in conjunction with the web width reduction, to make it more of a newspaper for the digital age, is coming out of that work. Some interesting circulation, marketing, and print online integration issues, where we can do a better job of putting our efforts together on the circulation-marketing side for both print and online, as well as on the ad sales side for print and online, is coming out of that work. So we're going to get a huge payback on the work that they helped us do.

Q - Dave Clark

Great. Thank you.

Operator

Our next question is coming from Douglas Arthur of Morgan Stanley. Please proceed with your question.

Q - Douglas Arthur

Peter, congratulations on all of the new initiatives put into place, and, Rich, congratulations, and hopefully they'll all reap a lot of the momentum here. Just on the, Rich, on the printing costs, particularly at the Journal, this ramp up in circulation promotion that you just referenced, which was $6 million in the quarter, is that something that is going to be in place for most of '06? Because that seemed like quite a significant number.

A - Rich Zannino

No. It will not be in place for most of '06. It was as much timing as anything else. We probably underspent that area earlier in the year, and we had to play catch-up at the end of the year on it to get to the circulation levels we want to be at going forward.

Q - Douglas Arthur

Ok, so, I mean, because it seemed like with the ramp in ad linage in the fourth quarter, the margins, even with all of the other issues you're carrying in that division, should have been higher. So is it fair to say that the leverage you expect in '06 is going to be a lot better than what we've seen in the second half?

A - Rich Zannino

Yes. I think that the answer is yes, although, when we look at our own internal plans and we look at the growth of print publishing year over year, if we strip out "Weekend Edition," the $9 million of launch cost for the web width reduction, we end up with flow-through on an incremental dollar revenue in that plan, in that budget, up near 100%. So we are getting the flow-through, the underlying core revenue. It's just we're spending some of it back on Weekend, and in the fourth quarter, we had a couple of those issues that we referenced, the severance charge and the higher circulation and promotional marketing expense. So we don't expect to anniversary those next year. I think our circulation expenses might be a little higher than average in the first quarter, but for the full year 2006 they're going to be in line with where they were in 2005.

Q - Douglas Arthur

Ok. Thank you.

Operator

Due to time constraints, our next question will be the last one we will take this morning, which is coming from Craig Huber of Lehman Brothers. Please proceed with your question.

Q - Craig Huber

Good morning. Thank you. Three of your last four months, clearly looking a lot better at the "Wall Street Journal," obviously helped by the Saturday edition. Is it fair to say you're feeling better about your business as you look out into 2006? I certainly note that your talk about comparable costs up 3% this new year after, I think you said 0.8, 0.9% in each of the prior two years, or am I looking into that too deeply? Thanks.

A - Rich Zannino

Craig, could you repeat the second part of it? I missed your point.

Q - Craig Huber

Your budgeting for comparable costs up 3% in this new year. I think you said they were up 0.8 and 0.9% over each of the prior two years. Does that mean you're just feeling better about your top line going forward, or just the fact that you just can't keep running a business with comparable costs only up about 1%. And I have a couple of follow-ups. Thanks.

A - Rich Zannino

I think in the terms of the first part of your question, we are optimistic that 2006 will be a better year on the top line at the Journal than 2005, both because of the trend of underlying business, as well as "Weekend Edition," as well as some other initiatives that we have that we talked about. In print publishing, we're holding comparable expenses to only up 1%, because even if we grow the way we want to grow in 2006, we're still, our margins are still far short of where we need them to be and want them to be in print publishing. That leaves the balance of the spending to get us to the 3% in the areas like electronic publishing, for example, and where we have many growth initiatives and we want to fuel those growth initiatives, so the comparable expense increase there is in the 6% range. And then we're spending a little bit more than the, we're spending in the mid-single digits in 2006 at Ottaway, which is a little higher than you might expect. But the print part of the community newspaper business is tough right now. Auto classified is down; real estate has been helping us, but none of us are very bullish on real estate for 2006, "none of us" meaning people here at Dow Jones or anywhere else that's in the community newspaper business.

We're putting initiatives in place to help drive top line, and those are everything from the internet, that we've talked a lot about, to other community media franchise extensions like lifestyle magazines and retirement magazines, in local markets, things like Spanish language publications that we're testing in two or three of our markets. Also on the infrastructure side, we're looking for ways to leverage our infrastructure with contract delivery. "Cape Cod Times" is going to be delivering "The Boston Globe," for example. We're doing similar things up in New Hampshire. And so we're looking to leverage our infrastructure by driving revenue there, and all of those things will drive revenue, which is why we're predicting the mid-single digit revenue growth, but you also have to invest in them. The alternative is to hunker down and not do anything, and we don't feel that that's an appropriate long-term strategy for the community newspaper business. So, rolling all of that up, that explains why we're in that 3% comparable expense growth range. I think if we don't see the top line materializing, you would see us do what we've done in years past, which is try to hold the line on expenses and that 3% would come down. So that's a long-winded answer to your question, but it is both. We are optimistic that we can see the top line grow and we are fueling some of that growth, but if we don't see it we'll pull back like we've done in years past.

Q - Craig Huber

Thanks for that. This is a totally separate question on circulation. You are charging, I think, $215 a year now for six days a week. Obviously, your number one competitor, The Times, is up at about $500 a year, including their latest 4% increase, I guess, in February. Obviously, that's a huge gap; they are seven days a week, you guys are six. I don't understand, I guess, why, given your even higher-end demographics, you guys don't think in the coming year you can raise that $215 up substantially? I think you mentioned earlier that you're not going to do it in 2006? Can we look forward to 2007, 2008, it going up quite a bit? Thanks.

A - Rich Zannino

"The New York Times" has total circ of about 1.1 million, and we have total circ of a 1.7 million-ish, so that's part of the reason. We could raise prices that way if we were happy to have total circ of 1.1 million, but that's not where we want to head. It is a tough market right now for print circulation, and we think we're priced right relative to our circulation economics. We think that, net, if we put through a price increase in 2006 it might cost us more on the bottom line than it would gain us, so we're going to hold prices flat for 2006 and revisit it in 2007.

A - Peter Kann

I would add I don't think we view "The New York Times" as our primary competitor, which was the premise of your question. I mean, I think we compete with a whole lot of publications and other media that are primarily focused on business, and "The New York Times," is a fine general interest newspaper, but it is not, in that sense, our primary competitor.

Q - Craig Huber

Okay. One last question on Factiva, intercompany charge, we're talking about the change there in terms of the intercompany accounting, are we talking just a couple million dollars that moves up to the electronic publishing line? That's it. Thank you.

A - Gordon Crowvitz

Craig, it is very modest in that range.

Q - Craig Huber

Thanks.

A - Peter Kann

Thank you all for being with us for the last hour.

Operator

Thanks, everybody. Ladies and gentlemen, that does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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