Good day, and welcome to The New York Times Company Second Quarter 2011 Earnings Conference Call. Today's call is being recorded. A question and answer session will follow today's presentation. At that time, if you would like to ask a question, please press star one on your telephone keypad. For opening remarks and introductions, I'd like to turn the call over to Ms. Paula Schwartz, Director of Investor Relations. Please go ahead.
Thank you, and good morning, everyone. Welcome to our second quarter 2011 earnings conference call. We have several members of our senior management team here to discuss the results with you, including Janet Robinson, President and CEO, Jim Follo, Senior Vice President and Chief Financial Officer, Martin Nisenholtz, Senior Vice President of Digital Operations, Denise Warren, Senior Vice President and Chief Advertising Officer for New York Times Media Group, and General Manager, nytimes.com, and Roland Caputo, Senior Vice President and Chief Financial Officer for The New York Times Media Group. All of the comparisons on this conference call will be for the second quarter of 2011 to the second quarter of 2010, unless otherwise stated. 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 2010 10-K.
Our presentation also includes 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. Now I'll turn the call over to Janet Robinson.
Thank you, Paula, and good morning, everyone. The second quarter was a historic one for our company as we successfully managed the launch of The New York Times digital subscriptions and began to see the early effects on our overall financial performance. The positive consumer response to the subscription packages is a strong indication of the value users place on our world-class news analysis and commentary, and it reflects our growing ability to capitalize on secular trends that show consumer willingness to pay for content across multiple digital platforms. We are pleased with how this initiative is rolling out and in particular, performance of key metrics, including the volume of paid digital subscriptions, overall traffic rates, and digital advertising revenue. In the second quarter, we also continued to post solid year-over-year gains in digital advertising revenues at the News Media Group.
In addition, the rate of home delivery circulation declines moderated due to an uptick in new home delivery orders and a decline in attrition since the launch. With the challenges presented by the economy and our industry still front and center, success was certainly not guaranteed with this transition added to the mix. Significantly, we rolled out these highly anticipated changes with minimal disruption. This is a long-term effort and the full potential of our new digital model will become more evident as the year progresses, providing us with a significant new revenue stream in the second half of the year. As we continue to position ourselves to capitalize on the digitization of our content across multiple business units, we are confident that the path we have been pursuing to transform our company is the right one.
In the second quarter, we continued our focus on strategic initiatives, including advancing the monetization of our digital offerings with the successful introduction of The Times' digital subscription packages and plans to launch a bostonglobe.com subscription site in full swing. Further solidifying our enduring commitment to premium journalism with the announcement that Jill Abramson will take the helm as the next Executive Editor of The New York Times in September. Remaining diligent on expense controls even as we invest in new business models and other digital initiatives across our businesses. Managing our asset portfolio to maintain its alignment with our core operations and strategic initiatives, leading to the sale of more than half of our Fenway Sports Group stake at the beginning of the third quarter for $117 million, a deal that triples our initial investment, and we are seeing robust demand for our remaining interest as well.
Lastly, strengthening our liquidity position, enabling us to prepay next month our 14% notes more than three years before the due date. Turning to the advertising marketplace, business uncertainty did not abate in the second quarter as advertisers remained sensitive to global events and to divergent economic forecasts. This manifests itself in producing limited visibility and continued volatility with regard to planning and ad spending. Illustrating these effects, a 3% increase in our digital advertising revenue could not offset the 6% decline in print advertising revenue in the quarter, leading to total advertising revenues being down 4%. Circulation revenues saw a boost from the launch of subscriptions across The Times' digital products and ended flat for the quarter. Total revenues were down 2%.
With expenses down 1% for the quarter, our operating profit before depreciation, amortization, severance, and special items decreased to $83 million in the second quarter from $93 million in the same period of 2010. On a GAAP basis, we saw an operating loss of $114 million in the second quarter compared with an operating profit of $61 million in the same period of 2010. Diluted earnings per share, excluding severance expense and special items were $0.14 in the second quarter compared with $0.18 in the same period of 2010. On a GAAP basis, we reported a diluted loss per share of $0.81 in the quarter compared with EPS of $0.21 in the second quarter 2010 period. As Jim will detail later, the GAAP EPS and operating profit numbers include special charges of $0.95 per share in the quarter. EPS in the second quarter of 2010 included a $0.3 per share gain.
As I mentioned earlier, Times Digital subscription packages launched globally at the beginning of the second quarter, and the response has been encouraging. At the end of the second quarter, paid digital subscribers were approximately 224,000. This is a net number and excludes any subscribers who may have opted out after their initial promotion offer. In addition, paid digital subscribers to replica editions and e-readers such as the Amazon Kindle and Barnes & Noble NOOK were approximately 57,000, bringing total paid digital subscribers to 281,000. In addition to these paid subscribers, there are approximately 100,000 highly engaged users who have free access to nytimes.com and its smartphone apps this year through a paid sponsorship from luxury automobile manufacturer Lincoln.
While the news cycle makes month-to-month comparisons difficult, average monthly nytimes.com unique visitors for the quarter were about 33 million in the United States and generally in line with the 11-month average for the site leading up to the launch of subscriptions. While page views decline was less than we projected. In our new online model, we are trading some of our lower rate remnant advertising inventory for a subscription revenue stream direct from consumers. We continue to meet all of the demands for premium inventory on the site. Expanding the accessibility of our digital subscription packages even further, we continue to enhance our offerings, which now include shared all digital access, meaning that home delivery subscribers and digital subscribers to our most comprehensive package now receive an additional login to share with a member of their household.
The launch of Times subscriptions in the iTunes Store, and the addition of nytimes.com access to our subscribers on the Kindle and NOOK at no additional charge. This fall, we also plan to launch International Herald Tribune digital subscription packages, which will include a suite of digital offerings that generally mirror The Times' packages. As you will recall, our new digital model enables users to access 20 articles for free each month, but asks them to become subscribers once they hit that mark. The homepage, section fronts, and DealBook all remain browsable for free at this time. We are intent on remaining part of the open web, so we are welcoming visits from third parties such as search engines, social networks, and blogs.
Of course, all home delivery subscribers receive free access to our all-inclusive digital package, providing them with Times content across the website and tablet and smartphone apps. Since mid-March, we have also seen growth in the number of home delivery subscribers who have taken the initiative to link up their print accounts to nytimes.com, and that total was approximately 756,000 at the end of the second quarter. This high rate of multi-platform penetration reflects the strength of our brand and the engagement level of our readers. While The Times apps for both the iPad and iPhone remain free, access beyond the top news section is now available only through subscriptions being offered in conjunction with the digital packages. In total, we have seen nearly 7 million downloads of our iPhone news app since its 2008 launch and nearly 2.3 million downloads of our iPad app since its original launch.
Advertising positions continue to see high demand on the iPad and are currently sold out through the end of the third quarter. The e-reader application business has proven to be another vibrant market where consumers are willing to pay for quality content, further diversifying our revenue streams and strengthening our digital businesses. The two leading e-reader platforms, the Kindle and the NOOK, began offering subscribers to The Times on these devices free access to nytimes.com in early July. We are currently the best-selling newspaper on both of these e-readers. I have already referenced a variety of metrics related to our digital subscription packages, but I would like to provide you with one more.
With the updated numbers I have provided today, including the digital readers who have begun paying within the first three months, subscribers to The Times on e-reader devices, users receiving free access through our Lincoln sponsorship program, and home delivery subscribers who have linked their digital accounts. We have an early read as to the initial audience that is most engaged with our digital offerings. In total, The Times has paid or sponsored relationships with more than 1 million digital users at the end of the second quarter. Given all of these strong statistics, it is no surprise that nytimes.com has maintained its leadership position in brand advertising in this new subscription environment. As marketers continue to come to us for our reach, the quality of our audience, and our ability to create and execute unique campaigns.
Premium advertisers such as Westin, HBO, and Audi have made the site their first destination for breaking digital advertising campaigns, especially on our homepage, which remains available to all nytimes.com visitors and drives a substantial portion of digital advertising revenue. Now let me offer some more depth on our second quarter revenues. Total revenues for the company declined 2%, with advertising revenues down 4%, circulation revenues flat, and other revenues down 1%. At the News Media Group, which includes The New York Times, New England Media Group, and Regional Media Group, continued strength in digital advertising, which was up 16%, could not fully offset the softness in print advertising, which ended down 6%.
We began to face difficult comparisons in May at The Times and the Regional Media Group from BP's 2010 spending related to the Gulf oil spill, which was significant and responsible for approximately 1.5 percentage points of the print decline. The third quarter impact is expected to be similar. The News Media Group's total advertising revenues, which declined 2.5% year-over-year in the quarter, declined 3% in April, were flat in May, and declined 4% in June. Digital advertising remained resilient, led by growth in national display. We saw gains in online retail display as well as the digital automotive classified category. By total advertising category, national revenue was up 2%, retail was down 9%, and classified was down 8%. Within the classified area, recruitment was down 4%, automotive declined 6%, and real estate was down 13%.
Breaking down the News Media Group into its component properties, at The New York Times Media Group, advertising revenues were down 1% in the quarter as growth online nearly offset print declines, demonstrating a pattern similar to the previous quarter. Overall advertising saw strength in May, but then fell in June. Combined print and digital national advertising at The New York Times Media Group was up slightly. Categories experiencing the largest gains were technology, driven by a search engine branding campaign, and enterprise solution marketing by software companies. The luxury cluster experienced gains driven by campaigns from American and international watch manufacturers and clothiers. Books driven primarily by promotion of electronic reading devices. National categories where we saw the largest combined losses were hotels driven by a postponement of campaigns to the second half of the year, and increased spending last year by the tourism boards associated with the 2010 Olympics.
Transportation, due to domestic airline consolidation and marketing strategy shifts, and corporate, as increased spending from energy companies only partially offset the BP image campaign in the second quarter of 2010. Aggregate retail advertising declines were in line with the prior quarter as consumer confidence continued to be affected by high unemployment rates and macroeconomic events associated with the global fiscal environment. Aggregate classified advertising declined on all platforms due to lingering softness in both home sales and the job market in local and national arenas. Print innovation was showcased at The Times during the quarter as we launched our new Sunday Review section, which replaces Weekend Review in print and on mobile apps and takes over the opinion pages online on Sundays.
Sunday Review is unique in that it offers news analysis and opinion pieces side by side with material from The Times' editorial, op-ed, and news departments, as well as from outside contributors, as a reminder of how The New York Times has remained committed to investing in its newsroom, even when others in the industry were scaling back. Last month, The Times received two Gerald Loeb Awards for Paul Krugman in commentary and Ron Lieber in personal finance. The Times is also bolstering its already strong business coverage with the addition of Pulitzer Prize-winning journalist and best-selling author James B. Stewart, who was named a Business Day columnist in May. At the New England Media Group, advertising revenues declined 3% in the quarter due to weakness in print advertising. Digital ad revenues showed solid growth on a monthly basis, reflecting increases in the national and automotive classified categories.
Combined print and online national advertising was up, led by gains in the financial services and travel categories, offset in part by decreases in national automotive and telecom advertising. Total retail advertising revenues were lower, led by softness in categories including department stores and home improvement, offset in part by increases in the sporting goods and automotive accessories categories. Aggregate classified advertising also declined overall. The Globe is approaching the launch of its two-brand strategy, which is expected to take place in September and will keep boston.com free while starting bostonglobe.com as a subscription site. The Globe and boston.com are both established brands in the regional marketplace, offering us the opportunity to meet the media needs of two distinct audiences. We plan to announce pricing and other details for bostonglobe.com closer to the launch.
At the Regional Media Group, advertising revenues decreased 9% due to weakness in print advertising, particularly in the retail category. On the digital side, the group saw strong growth in retail and national display, as well as in automotive and real estate classified categories. At the larger News Media Group, circulation revenues were flat for the quarter as the new digital revenue stream at The Times helped to offset a decline in print copies sold across our newspaper properties. While we have seen a positive impact on home delivery trends at The Times associated with the launch of digital subscriptions, print circulation was still slightly lower compared with the second quarter of 2010. Moving on to the About Group, total revenues declined 17% to $28 million in the second quarter, due principally to declines in both cost per click and display advertising.
We are proactively responding to some of the secular shifts taking place in the search universe. In addition to management changes at About in the quarter, we continued to execute on planned investments toward a number of strategic initiatives. About has redesigned its homepage and is currently expanding the volume and distribution of expert content on its platform, including launching its Spanish language channel, which can be accessed at about.com/espanol, increasing its roster of topic sites, which is now at more than 900, and doubling the number of how-to videos across its 24 channels, which will soon be available via YouTube. Design changes and cost per click advertisements served by Google continued to have a negative effect on click-through rates in the quarter. Although we believe we will finish cycling through that impact at the end of July.
As a result, we expect to see a modest improvement in CPC revenue beginning in August. For reference purposes, the first half of 2010, cost per click advertising revenue increase of 23%, while in the second half of 2010, cost per click revenue was down 4%. About also experienced a negative effect on page views in the second quarter of 2011 due to increased competition, as well as algorithm changes Google implemented in the first quarter. Display advertising saw second quarter declines in categories such as retail, education, and home improvement, but showed growth in categories including packaged goods, pharmaceuticals, and travel. In addition to the effects of competitive market pressures, About was again cycling difficult comparisons with the second quarter of 2010, when display advertising grew 39%.
The About Group's operating costs decreased 11%, and operating costs, excluding depreciation, amortization, and severance, decreased 15% to $13 million, primarily because of lower compensation costs. Operating profit declined 24% to $12 million in the quarter. Nevertheless, due to its variable cost structure, About's operating margin remained strong at 42% in the quarter. Company-wide, total digital advertising revenues rose 3% to $85 million from $82 million in the prior year period. Digital advertising revenue at the News Media Group increased 16% to $58 million from $50 million, mainly due to strong growth in national display advertising. Digital advertising revenue continued to grow its share of revenues and made up 28% of our total ad revenues in the quarter, up from 26% in the second quarter of 2010.
In the third quarter, we currently expect advertising revenue trends similar to those of the second quarter, reflecting ongoing digital strength at the News Media Group, but partially offset by softness at the About Group. Overall, circulation revenue is expected to improve in the low single digits in the third quarter due to the positive impact of the launch of our digital subscription model. Wrapping up, despite the challenges to our business brought by the continued uneven economy and secular changes, the investments and initiatives we have outlined, particularly in our digital business, have secured our successful transition where the underlying value of our content is widely recognized and rewarded across all platforms. Now let me turn the call over to Jim, who will give you more details on our results.
Thanks, Janet. Our continued focus on expense control is critical to our overall strategy, and we remain diligent in pursuing opportunities to aggressively reduce costs and to further improve our financial flexibility. This was highlighted with the recent announcement of our intention to prepay in full our $250 million 14% notes 5 months before we had previously indicated, as we feel that utilizing the make-whole provision of that agreement is advantageous to us at this time. Our significant cash position, enhanced by the recent sale of 390 units of Fenway Sports Group $4 million pre-tax gain, and our November debt offering of $225 million at 6 5/8% provides us with substantial liquidity to support an earlier prepayment.
Given the high rate of interest, eliminating this debt from our balance sheet at the earliest possible date will ultimately provide a financial benefit in the form of interest expense savings that will exceed $39 million annually through January 2015. The estimated prepayment on August 15 will total approximately $279 million, which includes the $250 million principal amount of the notes, $3 million of accrued interest through the prepayment date, and $26 million make-whole premium. The total prepayment amount is substantially the same as would have been due if we had prepaid on the January 15th, 2012 call date. We will incur a $46 million loss on the prepayment in the third quarter, which represents accelerated non-cash interest expense that would have been recognized over the remaining maturity period and the make-whole premium, although we expect the estimated charge will be approximately $27 million after factoring in a tax benefit.
Inmobiliaria Carso and Banco Inbursa continue to hold warrants to purchase 15.9 million shares of our Class A stock. These warrants expire on January 15, 2015. In the second quarter, operating costs were down 1% as a result of lower compensation costs, which were partially offset by higher newsprint expense and promotion costs associated with the launch of our digital subscription packages. While expense control efforts have become more challenging, we remain focused on identifying further efficiencies through our operations, which through 2012 could come in the form of increased manufacturing efficiencies, further leveraging of our centralized resources, and lower outside printing expenses.
Turning to special items, our second quarter earnings were unfavorably affected by a $0.93 per share by the write-down of assets at the News Media Group, primarily goodwill at the Regional Media Group, and by $0.02 per share for a withdrawal obligation charge under a multi-employer pension plan at the Globe. Earnings per share in the second quarter 2010 had been favorably affected by $0.03 by the sale of 50 of the company's original 750 units in Fenway Sports Group. The gain from our recent sale of an additional 390 units will be reflected in the third quarter. Severance costs increased by $500,000 to $1.9 million in the second quarter compared with prior year. Depreciation and amortization was $30 million in the quarter, on par with the second quarter of 2010. In 2011, we expect depreciation and amortization to be between $115 million and $120 million.
Newsprint expense increased 6% in the quarter, with an 11% increase from higher pricing offset in part by a 5% decrease in lower consumption. While newsprint prices have remained stable since July 2010, prices were higher in the second quarter as a result of prices rising steadily during the same period in 2010. In the third quarter, newsprint prices are expected to be relatively flat versus the same period of 2010. Net interest expense increased 22% in the quarter to $25 million as a result of the $225 million debt offering we completed in November. We now expect interest expense to be between $83 million and $87 million for 2011. Income from joint ventures was $3 million in the second quarter, compared to $8 million in the second quarter of 2010.
While our joint venture line will continue to see a negative impact this year from amortization expense associated with Fenway Sports Group's acquisition of Liverpool Football Club, that amortization expense will decline in the second half of the year, proportionate to the sale of 390 units in early July, which left us with a 7.3% stake. We expect income from joint ventures to be between $3 million and $4 million in the second half of the year, with approximately $1 million in the third quarter. We continue to manage our liquidity position and finished the quarter with $403 million in cash and short-term investments. Although this does not incorporate either the recent Fenway Sports Group sale or the Inbursa prepayment. We had no outstanding borrowings during the quarter under our new five-year, $125 million asset-backed revolving credit facility, which replaced our $400 million credit facility in June.
We continue to tightly manage capital spending, with capital expenditures totaling approximately $11 million in the quarter and $21 million year to date. We project capital expenditures will total between $45 million and $55 million for the year, including investments in digital systems across the company. The company had an effective tax rate of 12.2% on a pre-tax loss of $136 million in the second quarter, and an effective tax rate of 11.7% on a pre-tax loss of $130 million for the first half of 2011. The effective rate in the second quarter and the first half of 2011 was unfavorably affected because a portion of the Regional Media Group's goodwill write-down is nondeductible. Looking ahead, we expect operating costs to decline in the low single digits% for the second half of the year, with most of the decline coming in the fourth quarter.
With that, we'd be happy to open up for questions.
Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, you may press star one on your telephone keypad at this time. If you're on a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, you may press star one to ask a question, and we'll pause a moment to assemble the queue. We'll take our first question from Alexia Quadrani with JP Morgan.
A couple questions. The first one on the paywall. Could you give us a sense of what the average rate has been for the paywall? I know you disclosed what the rack rate is, but I assume there's some early promotions for signing up. I'm trying to get a sense of sort of what it's averaged in the quarter. And then staying on the paywall, could you give a sense of how the rate of subscription growth sort of is generally trending? I'm going to assume when you initially launched it, there was probably a big sign-up period, and it's probably moderated a bit, if you could give us some color around that.
Sure. I'm going to have Denise and Martin give you an overview in regard to those questions.
Alexia Quadrani, just on the average rate question, we're not disclosing that, but what I can tell you is that the bundle that is the web and smartphone bundle, as you would imagine, is the bundle that is more significant in terms of purchasing than the other two. That should help you a little bit in trying to calculate your estimates. As you would imagine, the rate of sub growth does slow in the quarter, but that's because we had such an outstanding launch in the beginning. I also want to say that this is a brand-new initiative for us.
It's three months old, and as Janet indicated in her remarks, we're very pleased with our performance to date, and we still have yet to launch many initiatives to support this going forward, both on the marketing and the product front, that we know will absolutely have an impact, a positive impact, on our results moving forward. Just to give you a little bit more color on that, things like gift subscriptions, things like corporate and group accounts. We are planning to launch those, but we have yet to launch them. We do believe that there's a lot of opportunity to grow this moving forward.
Just staying on the rate question for a minute, I can completely understand why you can't disclose it for competitive reasons and such. Is it possible to sort of give us a sense if there were some promotions involved, were they yearly? Were they monthly? We're just trying to get a better sense of when we may see an impact on sort of the pricing and trying to figure out a circulation revenue.
Sure. The promotion that we launched with that was most successful was a $0.99 offer for 4 weeks. We're very pleased with the conversion rate as people roll off that promotion, so that should also give you a sense.
Okay. That's helpful.
We also plan to offer that. It will just be as we build the subscriber file, the impact of that will deplete pretty rapidly.
Right.
As we go into the second half of the year, you will see a pretty significant growth in what we're getting per subscriber.
Okay. Just last question on the circulation side. You touched on, obviously, the print circulation declines being a bit moderate, a bit hopefully somewhat related to The New York Times' paywall launch. Also one of your peers noted earlier this week that, nothing having to do with the paywall launch, obviously, they're also seeing moderation in print declines in terms of volumes across their papers. Are you seeing any moderation, I guess, outside of The New York Times in terms of your circulation volumes?
We are seeing some. I think that the ABC comes out, as you well know, in September. We're seeing some moderation in some areas. I think the larger area of moderation that we've seen is predominantly at The New York Times.
Okay. Thank you.
We'll take our next question from Doug Arthur with Evercore.
Yeah. Just on the paywall subs, any color on geographic mix at this point, i.e., what kind of success have you had from international? Obviously, you have a large international following in your unique visitors, so any color there would be helpful. And then, Jim, can you give any specifics on headcount for the company, on sort of where it is now and what it is year-over-year? Thanks.
Where it is now, it's about 7,200, and that's about 2% year-over-year.
Doug, it's Denise Warren. On the geographic question, approximately 88% of our orders are from the U.S., and 12% are from the international marketplace. That will probably change, as we noted in Janet's script, that we launched the IHT subscription model in the third quarter.
Great. Thank you.
We'll take our next question from Craig Huber with Access 342.
Yes. Good morning. My first question, please. Can you talk a little further about costs? I guess why you're saying the cost of the fourth quarter will be down year-over-year more than in the third quarter? First question.
Well, there's two larger things, but there's a bunch of smaller things. As I said in my remarks, newsprint prices.
Increase. Our cost guidance that we gave for the second half of the year does assume that we have stable newsprint, essentially assumes we have stable newsprint prices, and that's been a negative headwind throughout the year. We also have spent meaningful amounts during the launch on promotion. Now, we'll continue to spend on promoting, and we will continue to be adaptable and adjust our planning. As of right now, we think that there will have been more spending in the initial three months of the launch relative to what we'll see in the third and the fourth quarter. Those are some meaningful expense contributors to that.
Janet, can you speak a little bit further about what you're seeing in the month of July so far on the newsprint or in digital ad revenue front?
As we noted, we're seeing similar performance as we saw in the second quarter that was in the release and in my remarks as well. I think it's very early in the quarter to predict how the quarter will certainly roll out. That's what we're seeing two weeks into it.
a little further on about.com. I think this is really the first time you guys have called out one of the reasons the revenue is down so significantly in the teens here due to competition. What are you seeing differently this quarter that you've seen in recent quarters? The algorithm change, you've talked about the change with the display placement from a year ago, Google, but
Yeah, I'm going to have Martin walk you through, because there's been a lot of activity at About, and I think a very clear understanding of what's going on there is important.
Yeah, it's important to have the full background on About to understand where the business is and where it might be going. During the third quarter of last year, we implemented, I think Janet noted this in her remarks, a mandated design change by Google to the way we display their AdSense product, and that had an immediate negative impact on our CPC business beginning in August 2010. In addition, during the back half of last year, algorithmic modifications at Google further negatively affected our CPC business. In the display area, where we grew 39% in Q2 of 2010, we began to see pressure in Q4 of last year as more money flowed to social media and exchange-traded buying in the middle part of the market.
As we enter 2011, this created a kind of perfect storm as two major algorithmic changes at Google, they refer to as Panda 1 and Panda 2, in Q1 significantly impacted our traffic. The display trends towards social media and exchange-traded buying intensified again in the middle part of the market. During the second quarter, these display trends were magnified at About as a very, very hot market for digital sales talent created volatility in the sales force. During this past quarter, we made a management change at the top at About and have been working very hard, as Janet said, to put a new growth plan in place, a revitalized management team, and a new sales force. We are very pleased with the progress that we've made in just a couple of months.
We're now in the process of rolling out a much more disciplined sales plan. We're increasing the number of guides and growing our content corpus. We've hired a number of new salespeople. We've created a Hispanic channel, and we'll be adding to that over the coming months. We're more than doubling the number of videos in the corpus, and we have a significant initiative underway in both the social media and mobile app arenas.
Are you?
Yeah, I'm sorry.
I'm sorry. Are you expecting, though, some of that stuff obviously is annualized now, but for the third quarter here, are you expecting the about.com's revenue performance in the third quarter to be similar to what you saw here in the second quarter? I guess the concern here is if this continues a lot longer, it's a long way to offset the great gains you guys are doing on the paywall initiative front.
Well, as I say.
team to be down like this?
We expect to have continued volatility into the third quarter. Some of these things will begin to cycle through, and Janet mentioned the improvement on the design change. There should be some improvement in the third quarter on CPC. The business will remain volatile through the third quarter. As we get into next year and implement these changes, we expect to see improved results, obviously just based in some part on cycles. That's the short answer.
Very good. Thank you.
You're welcome.
I'll take our next question from William Bird with Lazard Capital Markets.
Good morning. I was wondering if you could just talk about the impact the iTunes Store launch has had on digital subscription sales. Also if you could just discuss how you think about capital returns after the Carlos Slim debt repayment. Thank you.
I'll start on the capital question. We're obviously making great progress over the last several years, and clearly putting 14% debt behind us is another pretty big step for us. I think on the pure kind of net debt side of the balance sheet, you're getting into pretty comfortable territory there. We still have pension funding issues that we're addressing, but we're certainly clearly getting closer to the point where we can consider those things. Part of that we'll continue to look at how we might be able to enhance growth in the acquisition area. We put all those things together. I think we're in a way better position. Right now, I think our priority still has to be getting some of the pension funding behind us, and once we do that, I think we'll be in a better position.
On the iTunes launch, as you know, this actually did not launch in the second quarter. It launched July 1st. It was a very smooth launch. We're tracking it closely, but at this point, we're not disclosing results or the impact of the launch.
Could you talk about initiatives to increment subscriber growth? You've had some success with the Lincoln initiative. Is it likely you'll do more things like that?
Yes, we absolutely will plan to do things like that. As you can imagine, the advertising community, just on that particular one, took great notice of the Lincoln sponsorship, and there are active conversations with the advertising community about sponsorships around the digital subscription plan. As I mentioned in an earlier answer, there are a number of initiatives planned both on the product and marketing front, as well as investing in our capabilities. We're making an investment in our analytics capabilities, for example, to give us a better predictive modeling capability. As I mentioned, we will be launching both group and corporate accounts, as well as gift subscriptions, which should also help to increment the subscriptions. Next year, and again, this is a little too forward-looking, but the Lincoln promotion, as you know, goes through this year.
We do believe we have a great opportunity when those engaged users go through the sponsorship phase to increment them to paying subscribers.
I would just add that it also, I guess I would call it phase two of the launch that included the addition of member of the household as part of your subscription and Kindle and Barnes & Noble NOOK being added. That's comparatively new, Bill. I think that there is a real opportunity there, primarily because the timing has been just recent of those additions.
Have you seen any change in conversion rates on the subs that you have been promoting to?
As I said earlier, we're extremely happy with the conversion rates, and we're really just rolling into the first 90-day analysis because this is only three months old, but we are very pleased with what we are seeing to date.
Great. Thank you very much.
You're welcome.
We'll take our next question from John Janedis with UBS.
Hi. Thank you. Good morning. Can you give us, if possible, just a little more granularity on circulation? Meaning, how different was churn in the second quarter relative to the first quarter? Have you seen a shift in subscriptions from the weekday to the weekend? What was the actual total change in print copies for the quarter?
Yeah. Since launch, we've seen a change in the rate of subscription orders. That's improved. We've also seen a positive change in the rate of cancellations. That's slowed noticeably. When we take those two effects, what we see is a moderation in the overall copy loss in Q2. The print portion year-over-year for Sunday in Q2 was a decrease of 2.3%. That's an improvement of 1.5 points over the drop we saw in Q1, and the daily in Q2 was down 4.5%. That's an improvement of 1 percentage point over what we saw in Q1. We actually have more subscribers now, absolute number of subscribers than we did at year-end 2010, which gets a bit to your mix question.
We're seeing increased orders across all of our offerings, seven-day, five-day, the weekend, and Sunday, but the increase is skewing more towards the weekend and Sunday.
Okay.
I'm sorry. Just to jump in, it's Martin. Going back to the About question, Craig, I think you mentioned a thought that the About declines would offset the upside on the paywall. Our analysis is that the About declines don't nearly offset the paywall upside. I think you're on a wrong track there.
Hey, Martin.
Yeah.
While I've got you, I know you've talked a lot about About over the past year or so, and I'm wondering, given the ongoing changes from Google, could that lead to a continuation of pressure there on revenue that really more than offsets the investment you're making to blunt that impact?
Well, what I didn't get a chance to say at the end of my comment on Craig's question was that the purpose of Google's algorithmic changes are to increase the quality of the content returns, and we support that. Their algorithmic changes have often benefited us in the past. These two changes that were made at the beginning of the year were, in my view very extreme. I obviously can't tell you what additional changes will happen in the future, but I can say that in the past, changes have benefited us. Changes have sometimes affected us negatively. We've always been able to respond to them, and we believe we can do that in the future. The purpose of Google's change is not some abstraction. It's to improve quality, and we believe that the quality of our content on About is very high.
Moreover, we're not doing any scraping, anything like that would bother somebody who was creating a search engine. We don't do that. It's not what we do. Any of the things they're trying to address in their changes are things that we support. I think over time, this is going to have a positive impact on us. I think obviously for the short term, I use the word volatility in the third quarter, that's where we are. We're working our way through it, the improvements in the content we're addressing. We've said that. I think over the long term, you're going to see that our methodology with the guides is the right one. That's a long-winded answer to your question, but I think that's how we feel.
Yes. May I ask one last question on advertising? What are you seeing, maybe a two-parter. What are you seeing from the legal and other category within classifieds? Has there been a change in foreclosures or other notices in terms of the way they're being advertised? And then separately, I think the movie category looks a little bit soft to start the third quarter. Is it a function of more sequels advertising less? And can you also talk about what you're seeing in financials and autos? Thanks.
As far as the legal, we aren't seeing major changes, no, in the way they've advertised on foreclosures. No.
In terms of what we're seeing so far in July, let me just start by saying, as you well know, the economic uncertainty is significant and continues to impact advertisers' commitments, which of course, makes it difficult for us to project forward what spending is going to look like. Whatever I say about July, and I'll give you a little bit of color on the categories that you asked for, may not be indicative of what happens in the quarter. Specifically, on your question about the studio business, you are correct. There are several sequels, and they tend not to be supported the same way as new genres, which were very well supported in Q2. That is what we're seeing in the entertainment sector.
As far as financial is concerned, we are seeing a quiet retail banking sector due mostly to the poor results that they've mostly just announced lack of product and the uncertainty regarding pending legislation. I'm sorry, did you ask about one more category? I can't remember.
Yes. Auto.
Yes, automotive. That sector is definitely seeing a weakness due to the deeper impact of the earthquake and the resulting supply chain impact. However, we do believe that based upon conversations we're hearing from advertisers, that this is likely to be a timing issue as they are still talking about many product launches later this year and early next year.
Thank you very much.
Mm-hmm.
We'll take our next question from Leo Kulp with Citigroup.
Morning. Two quick questions, if I may. First, can you talk about the change in digital ad revenues at The New York Times, specifically, and did you sort of see a slowdown like Yahoo and WebMD did? The second, can you remind us when you anniversary the BP image campaign and what the impact of that was on results?
Let me take the digital question first. As we reported in the script, the News Media Group saw a 16% growth in digital advertising revenues in the quarter. I think we had a very strong month, and we're very pleased with that performance. We did see in the quarter our digital advertising revenue, again, this is just at the News Media Group, improve. We think that's a very good trend. We did not experience what Yahoo experienced. As a matter of fact, if I recall from reading the Yahoo transcript, they had made mention of the fact that they were not able to sell as successfully their direct premium advertising, and therefore they were selling more remnant, which is much lower rate. That is not the case at The New York Times.
When you look at all of our premium units, we either had the same sell-through or a better sell-through than we had last year. We're very pleased with the digital performance this past quarter.
On BP, the heaviest spending actually will take place on a comp basis in the third quarter. Janet, in her remarks, suggested that about 1.5 points of the print decline in the second quarter was related to BP. The math on that would be about $3.5 million of national advertising. Somewhere in that range, as far as an impact on the third quarter, you would expect as well. The number becomes quite modest, almost nothing in the fourth quarter.
Thank you.
We'll take our next question from Edward Atorino with Benchmark.
Hey, good morning. I got a couple of questions. To any extent that there was a sort of a cannibalization or a shift of some of the print advertising to online, is there any way to comment on that? Number 1. Number 2, could the strength in circulation be due to your very effective promotional campaign and nothing regarding any relationship to the paid model?
The strength in circulation is a little bit of both. I think that what the moderation that Rowland outlined in regard to attrition is something that should be taken into consideration. Also the fact that we have seen an increase in home delivery orders due to the paid model and their desire to receive all digital access.
Ed, it's Denise. I don't know that we've seen any change in terms of your first question. For the past year, the metric that we look at in terms of cross-platform sales has continued to hold. Over the past about 80% of our print advertisers are running digitally. I think that gives you a good sense as to how advertisers are looking at us. We have a very strong cross-platform story, and it's very well-received in the advertising community.
Is there a pacing comment you could make regarding the online numbers, both in terms of circulation and advertising? The July numbers, August numbers.
No, I think it's too early for us.
Yeah
to predict how the quarter will roll out. I think what we've said about July, it being so early in July, we've noted that we think that it will look like second quarter in regard to the ad revenues. I think that's as far as we can go right now, Ed.
A question for Jim on the charge for the debt reduction. Is that going to be in the third quarter?
Yes.
What was it, 20, 26?
No. The loss is, I believe, $46.
40 something?
46 in just-
46, and that's in the third quarter.
That's in the third quarter.
In terms of year-to-year cost decline, it's going to be sort of back-loaded on the fourth quarter.
Yeah, yes.
For 2012, any early comment on the cost plans?
Too early to comment on that.
Finally, I wouldn't think Google is out to help anybody, Martin. I think you said they're out to get everybody.
Well, it's our job to be able to make sure that our content is of the quality that we want it to be, and we've always wanted it to be, Ed.
That was-
That's our job.
Yeah. It's not about Google. It's about the quality of our content.
Yes, but okay. I thought you were looking for help from Google. Sorry.
No, no. Not at all. We're not naive about Google.
Okay. Bye. Thanks a lot.
We'll take a follow-up question from Craig Huber with Access 342.
Yes. Hi. Could you give us a little more specifics, if you would, about the number of paying digital subs by the three tiers you have there? You mentioned briefly, but can you just give us a little more help on that, how it breaks down?
As I said earlier.
That 220,000 number.
What's that?
That 220,000 number, how it sort of breaks down between the three tiers?
Yeah. As I said earlier, we're not disclosing that number, but a bigger percentage is weighted towards the web and smartphone bundle, as you would imagine.
Which is the $15 offer. As you know, there's $15, $20, $35.
My other question, off topic here, a nitpick question. Online help wanted, what was the % change there for your company in the second quarter?
Online help wanted, down 7.1% company-wide in the quarter.
Was this fairly similar at your flagship paper?
Yes. It was.
Great. Thank you.
You're welcome.
It appears there are no further questions at this time. I'd like to turn the conference back over to today's presenters for any additional or closing remarks.
Thank you for joining us today. If you have any more questions, please give us a call.
That concludes today's conference. Thank you for your participation.