Dow Jones & Company Q3 2007 Earnings Call Transcript

| About: Dow Jones (DJ)

Dow Jones & Company, Inc. (DJ) Q3 2007 Earnings Call October 18, 0000 10:00 AM ET

Executives

Mark Donohue - Director, Investor Relations

Rich Zannino - Chief Executive Officer

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

Analysts

Paul Ginocchio - Deutsche Bank

John Janedis - Wachovia Securities

Scott Davis - J.P. Morgan

Operator

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

Mark Donohue

Thanks, Claudia. Good morning. Welcome to our third quarter2007 earnings conference call and webcast at www.dowjones.com. On thismorning’s call, we have with us Rich Zannino, our Chief Executive Officer; BillPlummer, our Chief Financial Officer; Gordon Crovitz, President, Consumer Media and Publisherof The Wall Street Journal; Clare Hart, President, Enterprise Media Group; and JohnWilcox, President of the Community Media Group. All will be available to takeany questions you may have.

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

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

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

Rich Zannino

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

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

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

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

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

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

We’ll continue to build on this momentum in the fourthquarter as we see another strong performance at EMG, we see print advertisingtrends improving at the Journal, and we see online advertising revenue growthreturning to the 20% range.

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

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

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

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

We’re using this new and stronger print platform tosignificantly increase circulation profitability. We’ve grown truly paidcirculation and increased circulation revenue for eight consecutive quarters, allwhile reducing our circulation marketing costs.

We’ve been constantly upgrading our ad sales team, adpackages and go-to-market strategies and tactics, which is enabling us todefend our dominant market share in traditional ad categories and take substantialnew share in emerging new categories, most notably consumer advertising. Thiseffort to take share in consumer advertising will be enhanced with the launchnext year of our high-end consumer magazine.

We’ve also reduced the annual run rate of printing,production and delivery costs of the Journal by some $35 million over the pastcouple of years and most importantly, we’re improving the quality of our newscoverage, our stock in trade, asevidenced by the two Pulitzers, including the most prestigious Gold Medal forPublic Service that the Journal won in 2007.

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

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

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

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

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

At our online properties, ad revenue grew 8% and again, weexpect to see our growth ramp back up to the 20% range online in the fourthquarter. Our online subscription revenue was up 12% in the third quarter, aspaid online Journal subs were up over 25% to 989,000. Our average monthlyunique visitors were up nearly 20% to about 17 million in the quarter, withpage views up an even greater 34% to 383 million pages.

At our Enterprise Media Group, we continue to post verystrong revenue, profit and margin gains and we’re rapidly creating a powerfulplatform to fuel our future growth. Webrought in a highly talented new management team and restructured thebusiness. We acquired and integratedFactiva and Alternative Investor Group.

We’ve continually invested in our indexes businesses, whichis helping drive explosive growth in revenue, profit and enterprise valuethere. We’re innovating with new technology and new products, such as ourPrivate Equity Deal Database that goes into beta in Q4 this year, theenhancement of role-based applications such as Factiva SalesWorks and Insight,and Newswires’ Wealth Manager and very high potential suite of algorithmictrading products.

These moves are also paying off. So far this year, revenue at Enterprise MediaGroup is up 80% and profits are up 55%, or $42 million. For the third quarter,we boosted EMG revenue by 80% and profits by 59%, or $16 million. If we includeFactiva in both periods, third quarter revenue at EMG was up 6% and we posted a40% profit gain.

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

Likewise, if you look at it on a year-to-date basis, ouroperating expenses before special items increased 14%, and this included about16% from acquisitions, which leaves us with a 2% decline in comparable expensesfor the year-to-date period.

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

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

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

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

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

We are not the wounded and malnourished media dinosaur thatmany in the press have recently portrayed us to be. On the contrary, ourfinancial, operating and journalistic performance over the past 20 months isproof that today we are a fast-growing, thriving and vibrant company: onepositioned for a very bright future.

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

Before opening it up for questions, given that this islikely our last earnings call, I’d like to extend my thanks and best wishes toall of those on the Street -- investors, analysts and others -- that havesupported Dow Jones. I’d especially like to thank those of you who have stuckwith us as we’ve charted our new course in these challenging times for ourindustry. I hope that your patience hasbeen duly rewarded.

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

Question-and-AnswerSession

Operator

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

Paul Ginocchio -Deutsche Bank

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

Rich Zannino

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

Paul Ginocchio -Deutsche Bank

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

Operator

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

John Janedis -Wachovia Securities

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

L. Gordon Crovitz

Thank you, John. I am here.

Rich Zannino

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

L. Gordon Crovitz

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

John Janedis -Wachovia Securities

Thank you.

Operator

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

Scott Davis - J.P.Morgan

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

Rich Zannino

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

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

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

Our interests are entirely aligned with News Corp.’sinterest on that score, and so we’re going to spend some time here digging evendeeper, perhaps, than we’ve dug in the past into looking at the model, and weare going to do that together with News Corp. and Rupert, and we’ll come to alogical conclusion, with the objective being to have the Wall Street Journal bethe biggest and the best website for business and financial news on the worldwide web, and to do that in a way that maximizes and optimizes the monetizationof our audience over the long-term.

That’s kind of the theory of what we’re doing and Gordon canjump in with some of the particulars in terms of the economics of the variousmodels, et cetera.

L. Gordon Crovitz

To just add a little bit of color to what Rich said, in the10, 11 years of the online Journal, our goal has been obviously to create asuccessful business model and as we look at the model, we do this from aposition of unique strength in the online world, where lo and among news mediacompanies, we’ve built an enormously successful subscription business online.As we said, we will soon hit a million paying subscribers to the onlineJournal. Barron’s Online, at well over 100,000, is now the second-largestsubscription news site in the world, thus surpassing the Financial Times.

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

So is there a way to continue to expand our audience whilemaximizing the profitability of our online operations? We think there are someinteresting opportunities to do that but I think it is important as outsiderslook at our model, to understand that for many years now, we’ve had a hybridmodel where most of our unique users, even before the acquisition ofMarketWatch, have been to open content, even as we’ve had very fast-growingnumber of subscribers to the online Journal.

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

Scott Davis - J.P.Morgan

That’s helpful. Best of luck.

Operator

(Operator Instructions) It appears we have no furtherquestions. I would like to turn the floor back over to management for anyclosing comments.

Rich Zannino

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

Operator

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

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