Resilient Strategy for Times Despite Toll of a Recession

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In a conference call with analysts late last month, Janet L. Robinson, the president and chief executive of The New York Times Company, laid out a vision of how the company would survive the downturn that is crippling the newspaper industry.

“As other newspapers cut back on international and national coverage, or cease operations, we believe there will be opportunities for The Times to fill that void,” she said, for both readers and advertisers.

But before it can execute what the industry regards as a “last-man-standing” strategy, the company has to get there first.

Unlike much of the industry, the Times Company, which publishes The New York Times, The Boston Globe and The International Herald Tribune, does not carry the kind of crushing debt burden that has led other publishers to default or file for bankruptcy, and it has fared better than most of its peers at holding on to revenue from ads and circulation.

But the company reported last month that its newspaper ad revenue fell 14.2 percent in 2008, for a drop of 19.5 percent in the last two years; industrywide, the declines were about 16 percent and 23 percent.

And unlike almost every other major paper in the country, the flagship Times newspaper has not significantly reduced the size of its newsroom or the content of its pages; its newsroom staff of almost 1,300 people and budget of well over $200 million are easily the largest in the country.

And perhaps more so than other newspapers, The Times has made a long-term bet on the digital future, integrating its print newsroom with the Web, adding blogs like DealBook and City Room, slide shows and videos, even taking on Wikipedia with its Times Topics pages. The bet was that Internet ads would keep growing fast enough to eventually outweigh the erosion of ink-and-paper revenue.

But that bet is still up in the air. The company’s digital revenue has leveled off after years of torrid growth — it actually declined slightly in the fourth quarter — and it remains just 12 percent of all revenue. And no one is sure of the trajectory for either print or digital ads once the economy recovers.

The drop-off in ad revenue both online and in print has put a squeeze on the company’s cash flow. As a result, the Times Company has been looking to raise money by trying to sell its stake in the Boston Red Sox and arranging a sale-leaseback of its new headquarters building.

It slashed its stock dividend by almost three-quarters, and last month, it agreed to borrow $250 million on punishing terms, including an interest rate above 14 percent, from Carlos Slim Helú, a billionaire from Mexico.

Newspaper industry analysts say that despite some published alarms to the contrary, the company has positioned itself well to ride out another year of recession, maybe two. The company still operates at a profit, and analysts say it might have gotten by without the Slim loan, but could not afford to take the risk because borrowing could be even harder in six months or a year.

“But,” said Edward Atorino, an analyst at Benchmark, a research firm, “I think they’ve put The New York Times out of danger.”

And there is a feeling among analysts that there is merit to the last-man-standing strategy.

“For most newspapers, we view a flattening-out” of revenue in 2010 or 2011, said Mike Simonton, senior director at Fitch Ratings, “but it’s very murky.”

By then, he said, “there could be dramatically fewer newspapers,” leaving those that remain in a stronger position to compete for readers and ads. “And then The New York Times should be a survivor.”

Ms. Robinson; Arthur Sulzberger Jr., the company chairman and publisher of The Times; and other executives declined to be interviewed to discuss the company’s track record.

One of the company’s two revolving credit accounts will expire in May, with no realistic prospect of renewal, reducing its capacity for short-term borrowing to $400 million. The company already owes $380 million on the two accounts, leaving little room to maneuver. It also has a $99 million payment on longer-term debt due in November, and $250 million in March 2010.

Money raised through a sale-leaseback and Mr. Slim’s loan are intended to help make those payments and pay down the revolving credit. But the company has also made a long chain of decisions that depleted its cash. Analysts who follow the company for the capital markets say that some of those moves look right even in hindsight, and others seemed right at the time.

Under that sale-leaseback deal, the Times Company would sell the 19 floors it uses in the building but not the six floors it leases to other tenants. The Times Company would still occupy and manage its floors and would have the right to buy back the space at a predetermined price when a 10-year lease expired.

“Their decisions probably would have been very different if they had expected this type of revenue environment, but I don’t think anybody did,” said John Puchalla, an analyst at Moody’s Investors Service.

The company’s clearest and biggest mistake, analysts say, was spending $2.7 billion to buy back its own stock from 1998 to 2004, despite historic high prices. That figure is more than three times the company’s current market capitalization, it outweighs the prices of all the other second-guessed moves combined, and it would be more than enough to ensure the company’s security for years to come.

Six years ago, the company paid $65 million for the half of The International Herald Tribune that was owned by the Washington Post Company, taking full ownership of a money-losing paper. The Times Company does not disclose The Herald Tribune’s performance, but executives say that after significant investment, it still loses money.

In May 2007, the Times Company raised its quarterly dividend to 23 cents a share from 17.5 cents, though by then, the industry downturn had begun and the first signs of a credit crisis were rippling across the economy. Big investors applauded the move, but “it was a difficult thing for us to swallow,” said Mr. Puchalla, of Moody’s.

Last November, the company dropped the dividend to 6 cents. By then, the 2007 increase had cost more than $47 million.

The biggest recent expense is the company’s new Midtown Manhattan headquarters, completed in 2007. The Times spent $600 million on the building, although the true net cost of the project is perhaps half that, taking into account the money the company made on the sale of its old building, income from leasing part of the new building and other factors.

“It’s tough to say whether the new building was a smart move at the time,” said John Morton, an independent newspaper industry analyst. “They certainly would be in better financial shape if they’d stayed in the old building, but how much better you can’t say. And the decision looked very different then than it does now.”

Looking ahead, revenue is expected to keep falling this year, and the company will have to keep cutting costs. Most analysts think it will have positive cash flow in 2009, but not by much.

Beyond that, the company’s future rests on questions no one can answer. When will the recession end? When it does, will the decline of print advertising slow to a modest pace? Will Internet ads make a big comeback?

Like most publishers, the Times Company is not able to sell all of the potential ad space on its Web sites. It turns much of the remainder over to ad networks, which sell it at a small fraction of the original price.

The company does not disclose figures, but industry executives say that online space — which a major newspaper could sell to an advertiser for $10 or more for every thousand readers seeing it — often yields the paper less than $1 when sold through a network.

Across the Internet, “we have a glut of unsold inventory every single day,” said Kelly Twohig, the digital activation director at Starcom, which buys media for clients like Kellogg’s and Nintendo. She said that could force major sites like NYTimes.com to cut back the online ad space they offer, to keep prices up.

“It’s about understanding, really, the efficacy of ads, and understanding how clutter hurts and lack of clutter helps from a branding perspective,” she said.

Still, advertisers say that after the recession, The Times will still be an attractive vehicle for them, if perhaps a lesser one.

Kelly Foster, the managing director of print investment at Mindshare, which plans and buys ads for clients like American Express and Kraft, said that marketers were going to be more tactical and probably would not advertise every day in a newspaper as they had in the past.

But, she added, “the timeliness of newspapers is always going to be there, and there is credibility to a New York Times.”

[Understand: NYTimes]