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The New York Times (NYSE:NYT)

Q3 2012 Earnings Call

October 25, 2012 11:00 am ET

Executives

Paula Schwartz - Assistant Director of Investor Relations & Online Communications

Arthur O. Sulzberger - Chairman, Interim Chief Executive Officer and Publisher of The Times

James M. Follo - Chief Financial Officer and Senior Vice President

Denise F. Warren - Senior Vice President and Chief Advertising Officer of New York Times Media Group

Scott Heekin-Canedy - President and General Manager

Analysts

Alexia S. Quadrani - JP Morgan Chase & Co, Research Division

John Janedis - UBS Investment Bank, Research Division

Craig A. Huber - Access 3:42, LLC

Douglas M. Arthur - Evercore Partners Inc., Research Division

Kannan Venkateshwar - Barclays Capital, Research Division

Leo Kulp - Citigroup Inc, Research Division

Operator

Good day, and welcome to The New York Times Company Third Quarter Earnings 2012 Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to your host, Ms. Paula Schwartz. Please go ahead.

Paula Schwartz

Thank you, Melissa. Good morning and welcome to our Third Quarter 2012 Earnings Conference Call. We have several members of our senior management team here to discuss our results with you, including Arthur Sulzberger, Jr., Chairman and Chief Executive Officer; Jim Follo, Senior Vice President and Chief Financial Officer; Scott Heekin-Canedy, President and General Manager, New York Times; and Denise Warren, Senior Vice President and Chief Advertising Officer, The New York Times Media Group and General Manager of NYTimes.com.

All of the comparisons on this conference call will be for the third quarter of 2012 through the third quarter of 2011, unless otherwise stated. As we noted in our release earlier this morning, the results for the About Group are reported in discontinued operations for all periods presented. Our discussion will include forward-looking statements, and our actual results may differ from those predicted. Some of the factors that may cause them to differ are included in our 2011 10-K.

Our presentation will also include non-GAAP financial measures, and we have provided reconciliations to the most comparable GAAP measures in our earnings press release, which is available on our corporate website at www.nytco.com, under Investor Relations.

And now, I would like to turn the call over to Arthur Sulzberger.

Arthur O. Sulzberger

Thank you, Paula, and good morning, everyone. Our results for the third quarter reflect continued pressure on advertising revenues, which have been dampened by the challenging economic environment, rapidly changing consumer habits and an increasingly complex and fragmented digital advertising marketplace.

At the same time, our results also reflect continued growth in circulation revenues led by the ongoing expansion of our digital subscription plan. Digital subscription trends have remained robust and at a quarter-end, paid digital subscriptions across the company totaled approximately $592,000, up 11% from the end of the second quarter.

Over the past 3 months, we have taken a number of decisive actions to better position our company for the future. First, was the selection of our new President and CEO, Mark Thompson, who will be joining us next month. We believe that his experience and accomplishments make him the ideal person to take the helm of The Times Company, as we focus on growing our businesses through digital and global expansion.

Second, just after the quarter closed, we completed the sale of the About Group for approximately $300 million in cash, plus a working capital adjustment. This sale will allow us to continue to enhance our focus on our core businesses of generating and distributing high-quality journalism.

And in early October, our ownership interest in indeed.com was sold for approximately $167 million. The after-tax proceeds from these 2 transactions further strengthen our solid liquidity position.

We have remained disciplined in managing our expenses even as we invest in our digital transformation and journalistic initiatives, including our extensive coverage of the London Olympic Games, the presidential campaign and the unrest in North Africa and the Middle East.

We continue to look for opportunities to broaden and deepen reader interaction, expand The Times brand and extend our global footprint. Over the past quarter, we have enhanced our presence in video, mobile and social engagement.

In August, The Times relaunched its online video player, which was developed for optimal viewing across multiple platforms, and we have made significant strides in the breadth of our video capabilities, including multi-hour live streaming video coverage of the Republican and Democratic conventions, as well as the presidential and vice presidential debates.

We have expanded our mobile product offerings, building on our NYT Everywhere strategy of offering Times content on a wide variety of platforms to reach subscribers and nonsubscribers where they want to access our journalism.

In June, The Times became available on the Flipboard app, which was the first time we've expanded our reach to users on a third party platform. And earlier this month, The Times launched an experimental HTML5 app for the iPad.

In addition to our large presence on Facebook and Twitter, we've been extending our brand on multiple social networks, including Pinterest, Tumblr and Google Plus.

With regard to our international expansion, we have announced that in the second half of next year, we will be launching a Portuguese language site for readers in Brazil, which is one of the fastest-growing economies in the world, not to mention, the site of the next Summer Olympics.

And The New England Media Group, bostonglobe.com recently marked its one year anniversary and continues to make progress in growing paid digital subscriptions. The site has implemented a variety of initiatives to increase the engagement of its readers and increase subscription opportunities, including new subscriber targeting capabilities, reducing the number of unlocked articles on boston.com and rolling out new features, such as monthly e-books.

On Boston.com, content enhancements in the areas of business innovation, Boston public school sports, local college news and an expanded network of community bloggers, there is a strong focus on increasing engagement and building community.

As you know, I assumed an active part on these calls this year, as I stepped into the role of interim CEO. I'm proud of all that we have accomplished as a company during this time, adjusting our portfolio, improving our balance sheet, driving our digital presence and platforms, all while maintaining our high-quality journalism and our brands.

With Mark Thompson joining us, it will be time for me to step away from these calls and turn the microphone over to him next quarter. I've enjoyed the dialogue with all of you and look forward to focusing on my duties as Chairman and Publisher.

Before I close, I'd like to say that we are delighted to welcome Mark, the former Director General of the BBC, as our President and CEO, which will begin November 12. I'm sure that you've read the recent reports of a controversy regarding the BBC's decision last year to cancel a news story investigating allegations of child molestation by one of their on-air BBC talents, Mark (sic) [Jimmy] Saville, who died last year.

Mark has provided a detailed account of -- as I said, Mark Saville, I apologize, Jimmy Saville, who died last year. Mark has provided a detailed account of that matter, and I am satisfied that he played no role in the cancellation of that segment.

In the months leading to our decision to bring Mark to The Times Company, Michael Golden, our Vice Chairman and I, along with the rest of our Board of Directors, got to know him very well. Our opinion was then, and it remains, that he abides by high ethical standards and is the ideal person to lead our company as we focus on growing our businesses through digital and global expansion.

Mark has already been in our offices this week, getting to know many of our employees.

And now I'd like to turn the call over to Jim Follo. Jim?

James M. Follo

Thank you, Arthur, and good morning, everyone. Our results for the third quarter reflect the continued strength in the circulation side of our business, led by double-digit growth in The Times digital subscriptions.

Halfway through the second year of the subscription model, this meaningful revenue stream has helped partially offset continued softness we've been seeing in our Advertising business, resulting in total revenues declining about 1% in the third quarter.

Circulation revenues rose 7% for the company and 9% for The Times Media Group in the quarter, led by growth in digital subscriptions. Total revenues also benefited from print circulation price increases at The Times and The Globe in the first half of 2012, which helped to offset decline in print copies sold at The Times and The New England Media Groups. Times has continued to see growth in Sunday home delivery and improved retention rates of home delivery subscribers, who received all digital access for free.

Meanwhile, the advertising landscape has been categorized by a challenging economic environment, which has been compounded by weakened business confidence, associated with the uncertainty around the elections and the pending fiscal Cliff. It's also been affected by ongoing secular trends and an increasingly complex and fragmented digital advertising marketplace.

Print advertising revenues decreased 11% and digital advertising revenues ended down 2%. Operating expenses before depreciation, amortization and severance were up 3%. On a GAAP basis, costs were up 2% and we reported an operating profit of $8.5 million in the third quarter. Excluding depreciation, amortization, severance, operating profit was $34 million.

Diluted loss per share from continuing operations, excluding severance, special items in 2011, was $0.01 in each of the third quarters of 2012 and 2011.

Now let me provide you more depth on our third quarter results.

Total advertising revenues decreased 9% year-over-year, and were down 4% in July, 11% in both August and September. August and September were particularly difficult months, with declines in both print and digital advertising, as business confidence weakened. Third quarter print advertising revenues decreased in the national retail and classified ad categories.

Additional advertising revenues declined 2% with lower ad revenues in the national and real estate classified categories were offset in part by growth in retail display and automotive classified categories.

Turning to The New York Times Media Group. Total revenues were flat for the quarter, with advertising revenues down 10%, circulation revenues up 9%, and other revenues down 13%.

The group's total advertising revenues were lower due to declines in national, classified and retail categories. Given the high percentage of its advertising revenues that come from national advertisers, increased pressure on that ad category weighed on the New York Times Group performance for the quarter.

Digital advertising revenues trended lower in the quarter, mainly due to the difficult economic climate and an increasingly competitive landscape. Standard web-based digital display advertising has been experiencing challenges, including a glut of available ad inventory and the resulting downward price pressure, as well as a shift toward ad exchanges, real-time bidding and all the programmatic buying channels that allow advertisers to buy audiences at scale, including through platforms owned or operated by Google and Yahoo!

The Times digital strategy remains centered on growing its subscriber base, while at the same time, extending its brand to subscribers and nonsubscribers on a wide range of platforms.

The steady progress in digital subscriptions in the third quarter was helped by a variety of marketing initiatives. We update our digital subscription volume numbers. As of the end of the quarter, Times Media Group had approximately 566,000 paid digital subscribers, up 57,000 or 11% from the end of the second quarter. This number includes subscribers to The Times and the International Herald Tribune digital packages.

Looking at mobile. In the third quarter, we experienced very heavy -- very healthy traffic and reader engagement on our mobile apps, particularly for our coverage of the Olympics and the presidential campaign. We also saw good advertising interest in mobile, with Ralph Lauren also as the sole sponsor of our iPad app and our Olympic coverage.

Similar to its ad sponsorship of the iPad app for Fashion Week last year, Ralph Lauren provided free access to certain sections, including sports, fashion, travel, home and garden, T Magazine and the Olympics during the 2 weeks of the game.

Moving to The New England Media Group. Total revenues declined 1% in the third quarter, with advertising and circulation revenues down 6% and 1%, respectively. Other revenues rose 19% on higher commercial printing revenues. Decline in advertising revenues was due to softness in national retail and real estate classified categories. Automotive and help wanted classifieds were up, and each saw increases in both print and digital advertising revenue.

And while total retail advertising revenue was lower due to softness in print, digital retail advertising revenues were up for the quarter.

At the end of the quarter, bostonglobe.com had approximately 26,000 paid digital subscribers, up 3,000 or 13% since the end of the second quarter.

Turning to costs. While we have remained disciplined in our expense management, as expected, operating costs rose in the third quarter, largely because of higher benefits and performance-based compensation costs, stock-based compensation expense and costs associated with increased commercial printing activity at the New England Media Group.

Costs were also up due to expenses associated with our growing digital businesses, as well as news-related expenses for our coverage of the Olympics and the presidential campaign. Meanwhile, we have achieved savings in certain areas, including outside printing, professional fees and raw materials.

With newsprint prices generally flat for the past 2 years, newsprint expenses declined 4% in the quarter, mainly due to lower consumption.

At the end of the third quarter, our cash and short-term investments totaled $614 million and net debt was $163 million. This does not include the after-tax proceeds from the transactions that occurred early in the fourth quarter.

As Arthur mentioned, in late September, we completed the sale of The About Group for $300 million in cash, plus networking capital adjustments of approximately $16 million. And in early October, our remaining ownership interest in indeed.com was sold for approximately $167 million.

Following the sale of our interest in indeed.com, we now have a minority interest in about a dozen new media companies. In addition to growing our digital businesses organically, from time to time, we make investments in new media businesses that complement our existing properties and expand our digital holdings.

Our liquidity and overall debt position also improved after the end of the third quarter, as we paid off $75 million, 4.61% notes that matured on September 26.

As we have said, one of our main priorities for cash has been managing our pension-related obligations, building on our strategy -- pension obligations and the resulting volatility of our overall financial condition. Last month, we offered certain former employees in the New York Times company's pension plan the option to commence their pension benefits immediately by electing to either take their lumps -- pension as a lump sum or as a monthly annuity. If an individual elects to receive a lump sum, the company's pension obligation to the individual will be settled.

While it's too early to estimate the participation rate, assuming an acceptance rate of 50%, with the pension obligations associated with the offer, the company would make settlement distributions of approximately $100 million, majority of which will be made by the end of 2012. And we would record a noncash settlement charge of approximately $45 million in the fourth quarter 2012. Settlement distributions will be made with existing access of the pension plan and not with company cash.

The actual amount of the settlement distribution and the charge will largely depend on the number of participants electing the offer and the associated pension benefit of those electing participants, as well as interest rates and asset performance. This offer is expected to have minimal impact on our underfunded pension plan balance and timing amount of our pension funding obligations. This offer augments the actions we have taken over the past few years to address our pension obligations.

As of December 31, 2009, we discontinued future benefit accruals. We froze existing accrued benefits in the company's company-sponsored qualified pension plans to nonunion employees and eliminated certain retirement benefits for various employees at The Globe with the amendment of certain collective bargaining agreements in 2009.

We plan to build on these accomplishments and to adjust the size of the pension obligations relative to the size of the company. In addition, we have modified our investment strategy to reduce the volatility and the funded status of our plans and are planning to shift some of these assets from equity investments to fixed income investments as the plans become more fully funded. Over time, we expect to have a significant percentage of pension assets invested in fixed income instruments as our plans become fully funded.

We currently expect to make a decision on the amount, if any, of discretionary contributions to our plan before yearend. We will consider several factors, including current and future expected direction of interest rates in determining the amount of any contribution.

Capital expenditures totaled $5 million in the third quarter and $20 million for the first 9 months of the year. We expect fourth quarter capital expenditures to approximately $15 million, as we continue to invest in our digital initiatives and other IT projects across the company. Accordingly, we are now projecting capital expenditures would total approximately $35 million, 2012.

While I know there's been a lot of focus lately on our significant cash balances and uses of this cash, as we have stated in the past, any decision to reinstate the dividend is considered on an ongoing basis by our Board of Directors, takes into account our earnings and capital requirements, as well as restrictions in our debt agreements, among other relevant factors.

Given that we are in the midst of our 2013 planning season, and Mark who will participate in this discussion -- decision, does not join us until next month, we plan on having more to say on this matter early next year.

Turning to the fourth quarter. We will have 14 weeks as opposed to 13 weeks since 2012 is a 53-week year. We plan to provide the revenue impact of the additional week when we release our fourth quarter results.

To recap, special charges that we expect to record in the fourth quarter will be an approximately $100 million after-tax gain on the sale of our interest in indeed.com, and a settlement charge related to the immediate pension benefit offer. In addition, we expect to record an estimated $68 million after-tax gain on the sale of About Group, which will be included in discontinued operations.

Moving to our outlook for revenues and costs. In the fourth quarter, overall advertising revenue trends are expected to be similar to third quarter levels.

Although we have cycled past the full year of digital subscription packages at The Times and The Globe, we expect to see continued benefit from our various offerings, as well as the print price increases implemented earlier this year, with total fourth quarter circulation revenues are expected to increase in the mid to high single-digits. And operating expenses are expected to increase modestly in the fourth quarter.

And with that, we'd be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from Alexia Quadrani from JPMorgan.

Alexia S. Quadrani - JP Morgan Chase & Co, Research Division

Just 2 quick questions. One, on your guidance for the fourth quarter with similar newspaper advertising declines, does that take into account the extra week in the quarter or not? And then the second question is really on what should we sort of assume for a digital sub growth per quarter? Do you think we can see another 10% to 11% growth in the fourth quarter? I guess, what sort of run rate are you looking at?

Arthur O. Sulzberger

Alexia, our statement about fourth quarter advertising largely excluded whatever benefit we might see from having that extra week. On digital growth rates, we don't really forecast and break that out going forward, other than to say we expect a good strong circulation revenue growth kind of similar -- in line with kind of what we -- a little bit of what we saw in the third quarter. So that would suggest good continued growth there. But we'd rather not be as precise as that.

Alexia S. Quadrani - JP Morgan Chase & Co, Research Division

I guess, put another way, the marketing initiatives behind that impressive growth you saw in the quarter, are those expected to continue or was there something sort of specific to Q3 that helped deliver those numbers?

Denise F. Warren

Alexia, it's Denise. We get this question a lot about how we're going to continue to increment our subscriber growth. And so let me try to frame it for you in a strategic way. I mean, we have generated, as you know, the sizable growth through a range of marketing and product initiatives, and that will continue. As we look forward, we're really investing in sort of 3 key areas to make sure that we continue to grow this business. One is first and foremost, the journalism. That is what our users are paying for. The second is that we're continuing to invest in user experience and more availability on new platforms, which is what was referenced in Arthur's remarks about flipboard, for example, as being part of our NYT Everywhere strategy, making the product available to more people so that we can bring more users into the brand. And then, finally, expanding the portfolio. We believe that there's untapped demand in the corporate, education segments, as well as in the international marketplace. And as well, we're beginning to explore entry-level product opportunities and higher-end products and suites of benefits. So as we have said and will continue to say, we are still in the very, very early innings of this initiative and we believe there's a lot of opportunity to come.

Operator

And next, we'll go to John Janedis from UBS.

John Janedis - UBS Investment Bank, Research Division

I'm hoping to dig a little bit deeper into circulation revenue at The Times. With revenue up about $4.5 million since the first quarter and over that time, you've increased single copy and home delivery prices and on top of that, I guess, you've increased digital subs to more than 100,000. Now I know there are some timing issues there, maybe some seasonality but can you help me think it through, meaning, why would revenue be a little bit more up sequentially? And do you think you're seeing daily print subs convert to digital only or Sunday only?

Scott Heekin-Canedy

There's a better seasonality in our year and the revenue can be a function of the marketing programs. The key drivers accounting for our revenue growth are, as we've said, the price increase that we put in place for both home delivery and single copy at the beginning of the year. And then the volume growth we've been driving in digital. The second question was what?

John Janedis - UBS Investment Bank, Research Division

I guess, are you seeing any kind of maybe shift from daily print subs to maybe digital only or Sunday? Meaning, is there any kind of negative mix there that you're seeing?

Scott Heekin-Canedy

No, not an unidentifiable one. The general dynamics, we -- single copy is the most likely source of some of the digital subscriber growth but we have no real way of tracking that because of the nature of those transactions. The home delivery trends continue to be positive. And both in terms of start levels and retention levels relative to -- prior to the pay model implementation. So the dynamics we've described over the past year are still very much in place. And as Denise said, we have an array of programs and sources, areas of investment that we think will continue to drive digital growth for quite some time. We, as you said, we're still in early innings.

John Janedis - UBS Investment Bank, Research Division

Scott, any reason why or any thoughts in raising Sunday-only home delivery to try to maybe get a little bit more out of the benefit or value you're giving to the subscriber?

Scott Heekin-Canedy

We look at our pricing options all the time, consider them on an ongoing basis. And as you know, we don't single and advance the changes we're going to make. But yes, we are very aware of what you're identifying.

John Janedis - UBS Investment Bank, Research Division

Maybe quickly for Denise. The digital ad revenues have now, I guess, been down for maybe 2 or 3 quarters, down in low-singles. The amount of which spoke to some of the challenges. But with inventory seemingly endless, how do you change or reverse that revenue trend?

Denise F. Warren

So I think there's a couple of things that you've identified, which are greatly impacting our performance there is obviously an abundance of inventory on the marketplace and there's efficient buying methods such as programmatic buying that are really driving the price down. But they're driving the price down in a particular segment of the inventory. So I think you really have to peel back the onion in terms of what you're offering. So for example, while overall, the trend was as we reported, negative and it was challenging, there are certain segments of the market that we're seeing robust growth in. For example, our tablet advertising performance is up fairly substantially. Now this is also a very small base, I just want to make that point, but it is an opportunity for us as well, smartphone advertising is growing. And the other thing I would point to, and I think you all know this, about the part of the market that we're trying to serve is brand advertising in a very custom and unique way. That business, those custom, high-impact ad units, will meet segment that business out from the rest of what I would call just your standard banner display advertising. That business is also performing very well. So I think it's really about focusing on those segments of the market and those opportunities.

John Janedis - UBS Investment Bank, Research Division

I know it's early but either from a digital perspective, any kind of commentary around what advertisers are saying around the holidays?

Denise F. Warren

I don't have any insight that goes out that far. You know how volatile this marketplace is so...

John Janedis - UBS Investment Bank, Research Division

Is the buying pattern still week-to-week?

Denise F. Warren

I mean, I think, you should just -- our guidance is that the fourth quarter is going to look like the third quarter. I think that's our best information and insight at this point.

Operator

And next, we'll go to Craig Huber from Huber Research Partners.

Craig A. Huber - Access 3:42, LLC

I don't think I saw it in your press release. Can you break apart corporate cost? And how do they trend versus a year ago, please?

Arthur O. Sulzberger

I think they were down. There's a lot of things that run through that line that make that tend to be very lumpy. Movement in our stock price drives it the way we account for compensation. But overall, just give me one second. We actually -- you're right, we actually are now reporting one segment. So we don't have detail, just give me one second, I'll pull that out. All right, Craig. let me get back to you on that and I'll have somebody pull that data.

Craig A. Huber - Access 3:42, LLC

Okay. And then another nitpick question, please. For newsprint, what was the consumption and the price change there, please?

James M. Follo

I think it was down, we said, overall, it was down 4%, and it's all consumption because price has been largely flat for the last couple of years.

Craig A. Huber - Access 3:42, LLC

Okay. And then can you just quantify, if you would, this pricing erosion that you're seeing with the digital advertising? What sort of range are those price declines?

Denise F. Warren

Well, I don't know that we're going to give an exact number, but we are seeing pricing pressure, as I mentioned, on the core banner display business. And I think this is really something that we're seeing kick in, in the third quarter. As business confidence weakens, as more supply comes on the marketplace and as the programmatic buying trends become more and more robust. But these are -- this is a new trend for us, Craig, in terms of the impact on our rates.

Arthur O. Sulzberger

Craig, just to follow-up on your corporate question. Corporate expense tends be lumpy from quarter-to-quarter, so I wouldn't read much into this, but our corporate expenses were down about $1 million in the quarter. Again, it's driven by a bunch of stuff that tends to be lumpy and often evens out over the whole year, so I wouldn't read too much into that.

Craig A. Huber - Access 3:42, LLC

Okay. Then another pricing question, if I could, they're down almost 11% for print advertising revenues. How much of that was volume, please, versus price?

Denise F. Warren

It was virtually all volume. I mean, there's always price in there. You know how complicated this is because price is really a function of the mix in the different segments that we're selling, but it was basically all volume.

Craig A. Huber - Access 3:42, LLC

My last question, please. Daily and Sunday circulation volume for flagship paper, what was that percent change versus a year ago, for the print?

James M. Follo

For the quarter?

Craig A. Huber - Access 3:42, LLC

Yes. For the quarter.

James M. Follo

For the quarter. Weekday print is down about 7%, and the Sunday is down about just under 2%. That's a rough trend that's been in place for a while now.

Operator

And our next question will come from Doug Arthur from Evercore.

Douglas M. Arthur - Evercore Partners Inc., Research Division

Two questions. Jim, on the pension, is the reason -- the overall -- I think your -- the implication of your commentary was that the overall obligation would not drop if you get 50% acceptance rate. Is that because you're taking cash out of the pension so it's sort of a net issue? I mean, it would seem -- I'm trying to figure out why you're doing this if the overall obligation's not dropping?

James M. Follo

The reason we're doing it is because our long-term goal is to shrink the size of the plan, really, on the liability side, and of course, asset side, we want to get this to be a smaller part of our business. The liability is on our -- all of our pension plans are quite large and somewhere around $1.7 billion. So as we go through processes of getting the thing fully funded and also shrinking it, that -- it just benefits because you don't see the volatility and the overhang on our company. And quite frankly, you've seen that happening. You're seeing an acceleration of these sorts with Google, you saw Verizon do that, you've seen GM, you've seen Ford do it. And it's all about shrinking the size of the pension plan. Because it's just -- it's a very volatile. It's very driven by interest rates, it's not in our control. And the reason why it doesn't really change, as what I said in my remarks, it doesn't change the underfunded status. The underfunded status meaning liabilities minus assets, is because you're basically taking both your assets and your liabilities down by that $100 million. Just a minor impact on the net number. Some but not enough to worry about.

Douglas M. Arthur - Evercore Partners Inc., Research Division

Okay. And then the second question. I mean, I get the fact that the economy is not perfect and people are highly uncertain and all that. But the ad number is really shockingly weak in the quarter. And it's kind of way off-trend of what you've seen in the last 4 to 8 quarters, particularly at The Times. Were there any particular categories, I'm thinking particularly the luxury retail category, which is pretty important to you guys, that kind of went off the reservation here?

Denise F. Warren

Yes, let me dig into that a little bit for you, in terms of the strong and weak categories. Actually, let me start with luxury, which was actually strong in the quarter not weak. So just to put that one out there. But in terms of the weakness by category, we saw many of our large categories were impacted, financial was down overall. And again, we just -- you can write off the economy, but we are hearing from business leaders that they are extremely concerned. And the lack of business confidence is growing in many, many segments, financial being one of them. Entertainment was down due to a lack of major releases in the quarter. Department stores had weak retail sales performance so that impacted us. And then real estate is down, mostly due to the lack of new development in the New York market and therefore, very, very tight inventory situation. In addition to luxury being strong in the quarter, we had nice performance from automotive and we also saw increased spending in transportation from the airlines.

Douglas M. Arthur - Evercore Partners Inc., Research Division

So you're saying luxury was actually a positive?

Denise F. Warren

Yes, luxury was positive in the quarter.

Operator

Your next question will come from Kannan Venkateshwar from Barclays.

Kannan Venkateshwar - Barclays Capital, Research Division

I have one question on the cost trend. Essentially, the margins this quarter have been really low. So going forward, in terms of the mix, what should we assume in terms of margin for the fourth quarter and what drove the biggest portion of this decline this quarter?

James M. Follo

Well, look, margin is always a function of our advertising revenues because when you lose $1 advertising revenue, you're losing at very high margin, we tend to think about as 80% to 90% margin. So there's always a story of how your advertising is performing. And look, while we're adding good dollars on the circulation side, we spend marketing dollars against that. Now incrementally, $1 subscription especially on the digital side is quite profitable. It is very hard to offset a weak environment like this. So I tend to not talk in future margin percentage just given how volatile our business is, given how high-margin the revenues come in and out of the business. So -- but the good news is, when it comes back, it comes back just as fast as it went out. But that's reason.

Kannan Venkateshwar - Barclays Capital, Research Division

Okay. And in terms of circulation revenue. I guess now that there is a critical mass of digital subscribers, that should start impacting margins positively at some point. How much of that -- so from a change in margin perspective, could you quantify that in terms of what the impact could be?

James M. Follo

It's hard to say because, as I said, as you're marketing to gain these dollars, while it's coming in at high margin, it's not coming in at 90% size. So when your revenues are down, it's largely driven by advertising, your margins will be under pressure. And so if you really wanted to focus on the margin, you really have to focus on kind of a long-term view of what we can do in that area. So that's really so much that I can say to that.

Arthur O. Sulzberger

The economics of digital subscription, revenue are very similar to the economics of print circulation revenue. Their -- the marketing upfront costs, in a sense, get amortized over the life of the subscriber. So we're in this growth phase and we're seeing that kind of amortization play out?

James M. Follo

Well, just to be clear. We don't actually calculate and we don't actually differ an amortized...

Arthur O. Sulzberger

I was talking about the finance, I was talking about the economics.

James M. Follo

The offering cost is meaningful against basically your high-margin going forward. But as always, we're in this growth phase. we're going to continue to spend money to drive that growth.

Operator

And next, we'll go to Leo Kulp from Citi.

Leo Kulp - Citigroup Inc, Research Division

Two quick ones. First, can you give us some color about how you're thinking about the potential size of any returns of capital?

James M. Follo

Leo, I wish I could. I just -- look, we recognize the issue. It's top of mind for us all. But this is something that really -- it's discussed at the Board and until we're prepared to make a statement, it's very hard to give that sort of view here. Just every -- all the inputs get put into it. And we'll -- as I said, we'll -- I think we'll come back in the early part of next year with a more holistic firm view on our capital allocation strategy.

Leo Kulp - Citigroup Inc, Research Division

All right, got it. And then second, can you talk a little bit about how the Chinese language website launch is going? And more broadly and longer-term, how do you think about the potential size and revenue impact of the Chinese and Portuguese language sites?

Denise F. Warren

So we've seen growth, first and foremost, from users in the marketplace. We've actually exceeded the number of users and pages that we had set out to reach when we put the plan together. So we're very pleased that the marketplace is taking to our initiative. And we've also exceeded our revenue expectations from advertisers. There's been nice interest from a range of advertisers, mostly in the luxury segment but from other segments as well. But this is still -- it's a very small initiative. So I just want to make sure you understand that. And we're optimistic about the launch next year of the Brazilian marketplace. We think it has the same opportunities, more or less, that the China website has seen for us.

Leo Kulp - Citigroup Inc, Research Division

Got it. And just one last one very quickly. Any update on the union negotiations?

James M. Follo

Leo, I think, as you probably know, we're in mediation with the guild. And we're optimistic it will see a good outcome from mediation. [indiscernible] mediation, there's really nothing more we can say right now.

Operator

And our final question today will be a follow-up from Craig Huber from Huber Research Partners.

Craig A. Huber - Access 3:42, LLC

Your comments about expecting costs in the fourth quarter up modestly, is that driven by extra marketing costs around your digital work you've done?

James M. Follo

Well, it's a lot of the same things I've been talking about for a while. I mean, look, some things go away. The Olympics is gone. So that will help. But as I said, the commercial printing workup in New England, which drove 20% growth, doesn't come with an insignificant amount of cost. So that's in there. We continue to spend money against marketing efforts in our digital products, that's in there as well. There's a little bit of lumpiness in some other areas, but those are the primary drivers to cost increases. A lot of stuff that's down year-over-year, but those are the things that largely will result in what should be a relatively small increase in cost structure next quarter.

Craig A. Huber - Access 3:42, LLC

Also sorry for this also. I want to ask on the pension. Could you just be a little clearer, if you would, for this year, what's the total cash that you plan to put in pension this year? I know it's early for 2013 but what's your preliminary thought for next year, too?

Arthur O. Sulzberger

Well, the only thing we're required to put in this year is about $40 million. So that will be in. And as I said in my remarks, before the end of the year, we will be making a determination of how much, if any, of a discretionary contribution we will put into the plans this year. Given the cash we have in the balance sheet, it could be -- it's something that we're looking carefully at. We haven't put a number out there yet. It'll be something that we'll discuss hopefully certainly at the Board level before we do that. I will say, however, that is not -- there is no required contribution to the qualified plan this year or likely the next year or 2. But the underfunded balance we came into the year with which was, on the qualified side, somewhere around $520 million is probably largely in that range. So there's reasons to want to attack that issue. But we've not put any number out there. And we will address it in the fourth quarter and we will talk about that on our next earnings call.

Operator

And that does conclude our question-and-answer session for today. And at this time, I'd like to turn the call back over to Ms. Schwartz for any additional or closing marks.

Paula Schwartz

Thank you, Melissa. If you have any additional questions, please give us a call. Thank you.

Operator

And that does conclude our conference for today. Thank you for your participation.

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