EXHIBIT 99.2
Dow Jones & Company
Third Quarter 2001 Earnings Conference Call
October 11, 2001
Peter Kann
Good morning.
The earnings we reported this morning were within the range we
gave you back on July 12, although admittedly at the bottom of that
range. But for the events of September 11, results would have been
toward the upper end of that range.
In any event, we were able to achieve this only through sustained
and effective cost controls. I would like to be able to tell you that
the revenue picture had brightened, or is brightening. But it had not
before September 11, and has not recently.
Before letting Rich take you through the details of today's
results, however, there are a few points I'd like to make to place this
all in some context.
First, I want to share with this audience how incredibly proud I
was of our people on September 11, and afterward. As many of you know,
our headquarters building was across the street from the Trade Center.
We safely evacuated our building, and blessedly lost no colleagues that
day. And then we went on, under enormously difficult conditions, to
continue to serve our readers without interruption, through the Dow
Jones Newswires, WSJ.com, The Wall Street Journal and otherwise. That
was important, I think, not only to our Company and our customers, but
also, I would add immodestly, to our society as a whole.
Our ability to have met this test is a source of pride, but I also
think it's more than that. I think we've done a great deal, over the
last month, to further strengthen the already quite strong franchises
The Wall Street Journal and the Dow Jones Newswires enjoy with their
readers. I've seen that effect demonstrated in anecdotal reader
reactions to what we've published, and in some strengthening of most
circulation metrics.
Beyond pride in quality, I think our ability to react as we did on
September 11 and thereafter was also hard proof that the cost cuts we
made earlier this year, while difficult and unpleasant, did not go too
deep, and did not compromise us operationally.
Looking to the future, I'm happy to report that we remain on track
for color capacity and other expansion of The Wall Street Journal next
year. You may have seen some live tests in the paper of our color
spread capability, using house ads, and these have gone well. Beyond
that, we'll have more to say on this subject at one of the investment
conferences in early December.
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More broadly, we remain committed to the four-tier strategy about
which we spoke in June and July. To review those four tiers briefly:
- Tier One is the aggressive pursuit of organic growth opportunities.
The centerpiece here will be the color page capacity expansion at the
U.S. print Journal beginning in the first quarter of next year, and a
number of design changes in the second quarter.
- Tier Two will be the development of new business opportunities that
further leverage our leading brands, including The Wall Street
Journal and the Dow Jones brand, and our core competencies in
business news and information.
- Tier Three is strategic alliances, including acquisitions and
partnerships. Nothing is imminent here, but we have been kicking
quite a few tires.
- Finally, as we've said, we'll continue to create shareholder value
through share repurchase.
In sum, the third quarter wasn't easy, and the fourth quarter
won't be either. But Dow Jones has an enormously solid foundation-in
fact, I think, an even more solid one than we did before the tragic and
trying events of the last month-and we're ready and able to build on
that as soon as the economic climate permits.
With that, I'll turn this call over to my colleague Rich Zannino, who
will take you through some of the numbers in detail, and then we'd be
pleased to take your questions.
Rich F. Zannino
Thank you Peter and good morning all.
Third Quarter Results
I'll begin by covering our third quarter results and the special
items that we reported this morning.
First, in Other Income, we recorded non-cash charges totaling $8.8
million, or $0.10 per share, to write-down two non-core investments.
This covers the write-off of our investment in iBEAM Broadcasting
Corp., a publicly-traded provider of streaming video, and the write-
down of our investment in Nation Multimedia Group, a multi-media
company in Thailand, to its current publicly-traded value of
approximately $2.5 million.
This charge was almost entirely offset by a special gain of $8.4
million, or $0.10 per share, also recorded in Other Income. This
represents the partial reversal of a reserve established at year-end
2000 to cover potential liability under our guarantee of certain
Telerate payments owed to Cantor Fitzgerald, as Bridge made its third
quarter payment to Cantor.
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We also recorded a $1.2 million gain, or $0.01 per share, in
Equity Income related to the early extinguishment of debt at our 50%-
owned CNBC Europe venture. These four special items, which were booked
below operating income, had a negligible impact on EPS.
The third quarter also included a charge to operating income of
$1.7 million, or $0.01 per share, related to the September 11th World
Trade Center attacks. This charge covered temporary relocation costs
of $1.8 million and a $1.0 million donation we made to the Twin Towers
Relief Fund, partially offset by $1.1 million in savings from rent
abatement at our presently unoccupied World Financial Center offices.
Most of these temporary relocation costs are now behind us and, going
forward, we expect any remaining dislocation costs to be more than
covered by rent abatement.
Excluding these special items, diluted earnings per share were
$0.20 - slightly above the $0.18 street consensus but well below last
year's $0.55 per share. Nonetheless, we are proud to have achieved the
bottom end of our original third quarter EPS guidance - which was $0.20
to $0.30 cents per share -- in spite of the events of September 11th.
These events caused considerable disruption to our, and our
advertisers', operations, which in turn led to significant lost
revenues for us. We estimate these lost revenues cost us $0.09 in
earnings per share in the quarter, predominantly at The Wall Street
Journal.
Including special items, EPS was $0.19 compared to a loss of $0.39
last year, with last year's loss reflecting a write-down of our
investment in Bridge preferred stock.
On a year-to-date, basis, EPS before special items was $0.90, down 64%
from $2.48 last year. Reported EPS was down 56% on a year-to-date
basis.
Company-wide, total revenues in the quarter of $397.6 million were
down 21% due to a 31% decline in advertising revenues. Operating
income, before special items, of $30.4 million and 7.6% of revenues,
declined 63.5% versus a year ago.
Year-to-date, total revenues of $1.34 billion were down 18%,
driven by a 27% decline in advertising revenues. These declines come
on top of last year's very strong 14% increase in total revenues and
29% increase in ad revenues. Operating income, before special items,
for the nine months of $133.9 million and 10% of revenue, declined 65%,
after increasing 42% a year ago.
The economic and advertising environments are, in a word, abysmal.
This is especially so in our core financial and technology advertising
segments. We cannot control this, but we are responding by controlling
what we can. We continue to aggressively manage and reduce our
expenses. In the first and second quarters, we reduced our budgeted
annual fixed expenses by $150 million, or 10%. These cuts involved a
reduction in our budgeted headcount of nearly 800 positions, or 9%. We
cut an additional $20 million in third quarter expenses to be able to
deliver our third quarter earnings commitment, in spite of the
considerable revenue pressure that we faced.
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Further evidence of our cost-cutting is found in the fact that our
actual headcount is down roughly 480 FTEs, or 6%, since the beginning
of the year. On top of this, in the last six months, since our cost-
cutting began, our expenses, excluding newsprint, are down $58 million,
or 8%, compared to last year. Evidence is also found in the reductions
we continue to make in our capital spending for this year - taking it
from the originally planned $200 million to our current forecast of
about $125 million.
While these are all significant reductions, they have not put our
business at short- or long-term risk. Short-term, this is evidenced by
our nearly flawless operating performance, even under the duress of the
past month. Long-term, we have not only preserved spending for news
gathering, news delivery and marketing to maintain the premium quality
of our brands and products, but we also continue to fund long term
growth projects such as color print expansion, WSJ.com and
international growth, to name but a few.
Looking at our results by segment: In Print Publishing, revenues
declined 30% to $229.3 million. Operating income, before special
items, fell to a slight loss of $363,000, as profits at The Wall Street
Journal and CNBC U.S. TV operations were offset by losses in our
International print operations. Our operating margin in the quarter
was flat compared to a 16.7% margin last year, with margins depressed
in each period by the fact that the third quarter is always our weakest
one for advertising revenue.
Revenue declines were led by The Wall Street Journal, where
advertising linage declined 49.2%, or 46.8% on a per issue basis, in
September, bringing the third quarter decline to 41.2%. We estimate
that ad cancellations and ads withheld, net of condolence ads related
to the September 11th attacks, cost about 12.5 percentage points in
September total Journal ad linage change and 5.2% in the third quarter.
By category, Technology linage, which represented about 25% of
last year's total overall linage, experienced a decline of 63% in the
quarter, after increasing 93% last year. The e-commerce portion of
technology was down 72% due to the virtual evaporation of ad spending
by B2B e-commerce firms. The balance of technology -- which includes
ad spending on personal computers, computer hardware and computer
software -- was down 51%, a significant deterioration in trend as these
areas experienced the greatest ad cancellations after September 11th.
We dominate the technology advertising category, especially so with the
shake-out that has occurred in the technology publishing world. And
while we do not expect all B2B e-commerce spending to come back any
time soon, the balance should, and we are well-positioned to
capitalize; regaining revenues and further boosting our market share in
this long-term attractive advertising segment.
In the balance of our General ad category, which represented about
35% of last year's total linage and includes B2C e-commerce,
communications, auto, professional services, travel, consumer and other
general spending categories, we saw across-the-board declines totaling
about 30%.
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In our financial linage category, which comprised about 25% of
last year's total Journal linage, we saw a decline of 48.7%, compared
to a decline of 13% last year. It is cyclically depressed at this
time, and the current uncertainty and volatility in the equity markets,
and sharply reduced Wall Street deal flow, have led to declines
virtually across-the-board in our financial linage. Like technology,
we dominate this category. If the advertising is there, we get it; if
it's not, we don't. When it comes back, we'll get it.
We posted a decline of about 19% in Classified and Other linage.
Our advertising revenue decline is in line with most of our
national advertising competitors, which include national business
magazines and newsweeklies.
While we cannot predict when advertising will rebound at the
Journal, we are taking aggressive steps to reduce our Journal expenses
and further grow our leading market share over the long term. At The
Journal, we have reduced our 4th quarter expenses, excluding newsprint,
13% below 1999 levels, to about 1998 spending levels. And we are on
schedule and on budget with the $232 million color print expansion of
the Journal which will add 20% more overall capacity - and 16
incremental color pages which sell at an approximate 25% premium to
black and white. This expansion creates the opportunity to add a
fourth section and build another editorial franchise, which will
generate new advertising franchises to not only increase ad revenues
but, even more importantly, diversify our reliance upon tech and
financial advertising.
Elsewhere in Print Publishing, Barron's ad pages were down 30.2% in the
quarter against a 0.3% increase last year.
The International editions of The Wall Street Journal also
experienced a very difficult advertising environment during the third
quarter. Advertising volume at The Wall Street Journal Europe was down
32.5% in the quarter, against a 6.6% increase a year ago. Linage at
The Asian Wall Street Journal declined 43.9% in the quarter, compared
with a 26.7% increase a year ago.
Turning to our Electronic Publishing segment, we see much brighter
news. Although revenues of $78.2 million were down 4.9% to last year,
operating income, before special items, was up 18% to $13.1 million and
our operating margin increased from 13.4% last year to 16.7% this year,
due to expense reductions.
This segment, which consists of Dow Jones Newswires, the Online
Journal, our vertical internet sites, Dow Jones Indexes and our radio,
reprints and permission services and licensing businesses, is
predominantly subscription based, providing a hedge against the
volatility of our advertising-dependent print businesses.
Dow Jones Newswires posted revenues of $58.8 million, flat to last
year, with terminals down slightly since last year due to retrenchment
in the securities industry. Newswires improved its profitability
during the quarter with cost reductions.
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At the Online Journal, revenue fell to $8.8 million in the
quarter, down 31% from $12.7 million a year ago. However, operating
losses were reduced, as the revenue impact of falling advertising was
more than offset with significant cost reductions as we rationalized
the cost base and further leveraged existing resources. This trend
began in the second quarter and we expect it to continuously improve.
Equally as important, the number of WSJ.com subscribers rose in
the quarter, to a record 609,000, up 20% from a year ago and up 14%
from 535,000 at year-end 2000. We believe this represents a 'flight to
quality' among readers of business and financial news and information
on the web, amid considerable turbulence in the sector, and further
validates our subscription-based business model.
Our Ottaway Community Newspaper segment posted another very strong
performance in the third quarter, especially relative to its peer
group. Revenues declined less than 1% to $90 million, while operating
income improved slightly to $24.6 million with operating margins up
from 26.8% last year to 27.3% this year.
Linage at Ottaway was down 1.7%, in line with its trend this year,
with operating expenses below year-ago levels, in spite of higher
newsprint costs. In a challenging environment, Ottaway is doing
exceptionally well. Its regional diversification and stable operating
performance provides a solid sales and earnings hedge against the
advertising volatility at The Journal and Barron's.
Our primary equity investments include: Factiva, our 50/50 joint
venture with Reuters; our 50% partnerships with CNBC in Europe and
Asia; our 50/50 partnership with Hearst in SmartMoney; our 40%
ownership of a newsprint mill in Canada; and our 22% interest in
Handelsblatt. We continue to see improved profitability in our equity
investments, as we recorded a loss of $3.2 million this year against a
loss of $4.7 million last year, before special items, due primarily to
the shutdown of Work.com, with modestly improved performance at
international TV and at SmartMoney, partially offset by lower income at
Factiva and Handelsblatt.
Our investment income in the quarter was down nearly $1.0 million
compared to last year due to lower cash balances this year..
Our effective tax rate was 40% this year compared to 39.5% last
year.
Looking at some other key figures. Total newsprint costs were
down 28%: with consumption down 26.7% and our average cost per ton down
1.8% in the quarter versus year-ago levels.
Our depreciation & amortization expense in the quarter decreased
to $26 million from $27.9 million last year. Our capital expenditures
were $22.8 million, down from $43.8 million last year. So far this
year, we have spent $94 million on capital projects compared to $138
million last year.
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During the quarter, we repurchased 750,000 common shares at a
total cost of $42 million and bought another 333,000 shares under put
contracts exercised in early-October. This brings our total
repurchases so far this year to 2.6 million shares for $154 million.
We have $453 million remaining on our share repurchase authorization.
We are aggressively managing our expenses, capital expenditures and
working capital to preserve our cash flow in this difficult environment
and we ended the quarter with only $233 million in debt outstanding.
Forward Outlook
Looking forward to the fourth quarter, our guidance is again
tempered by the continued very weak advertising market; exacerbated by
a worsening economy, with softness now found in nearly every economic
indicator. This is compounded in the short-term by the decision of
many major advertisers to suspend advertising while they re-strategize
their ad campaigns in the wake of September 11th.
On top of this, we are up against strong year-ago numbers as the
absolute level of advertising linage in the 4th quarter 2000 was at a
cyclically very high level. Although our 4th quarter, 2000 comp was
down 10%, this came on top of a very strong 4th quarter, 1999 comp of
up 36%, which was when the technology and dot.com advertising boom was
hitting its stride.
Finally, recovery, either in the broad economy, or in the
technology and financial sectors, is not yet apparent, with our current
ad linage trend in October, 2001 down in the 40% range.
Based on these factors, we are projecting linage in the fourth
quarter to be similar to the third. This results in a forecasted Wall
Street Journal linage decline of down 35% to 45% for the 4th quarter.
Together with continued revenue softness at Barrons WSJ.com and in our
International Print businesses and flat performance at Ottaway, this
implies a low to mid-20's percentage revenue decline in the fourth
quarter. Our expenses in the fourth quarter will again be well below
year-ago levels due to our cost reductions. In fact, 4th quarter
expenses will be lower than 1998 levels. This results in estimated
diluted EPS, before any special items, of $0.25 to $0.35 per share in
the fourth quarter, compared to $0.83 last year. This estimate is after
taking into account advertising cancellations received in the wake of
the September 11th attacks, which will cost about 7 cents per share in
the 4th quarter.
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In closing, we most definitely are operating in the most harsh
economic and advertising environment in at least a decade. We are
doing all that we can to profitably navigate this downturn, while
having the fortitude and resources - even in this down environment --
to prudently invest to maximize our future growth and profitability
when the economy improves. Because of these factors, one must, in our
view, look through current bottom-of-the-cycle earnings pressures to
accurately evaluate the intrinsic value of Dow Jones. We have - and
are enhancing -- a strong platform for value creation at Dow Jones:
- We have great brands, products and content, which have grown stronger
in the past month.
- We command leading market share in all segments served.
- We dominate national ad categories with excellent secular growth
prospects. And we are focused on diversifying our heavy reliance on
these categories.
- With our $232 million investment in 20% more print capacity (all in
color) at The Wall Street Journal, we will strengthen our editorial
franchises, add diversification to our ad base and significantly
enhance our growth potential.
- We have reduced our costs virtually to the bone, but not further than
that, and we will sustain the majority of these cuts into 2002 and
beyond.
- We are investing, and moving toward profitability, at WSJ.com for
long-term competitive advantage and growth.
- We have an improving profit trend at our very valuable equity
investments.
- We have powerful cash flow and a pristine balance sheet - even in
this down economy.
- We are determined to use this cash flow and leverage our balance
sheet to execute the four-tiered growth strategy outlined by Peter.
- And we are embarked on a new Long Range Planning process designed to
develop a specific roadmap to tap the full potential of our brands,
products, content and people which we will be communicating to you in
late-January 2002.
All of these activities are designed to enhance the quality and
indispensable appeal of our brands and products and to significantly
increase our shareholder value. Our entire management team is
committed to this effort.
With that, we'll ask Amy to open the phone lines and Peter, Gordon
Crovitz and I will attempt to answer any questions you may have.
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INFORMATION RELATING TO FORWARD LOOKING STATEMENTS
These remarks contain forward-looking statements that involve risks and
uncertainties that could cause actual results to differ materially from
those anticipated. Such risks and uncertainties include, but are not
limited to, the impact of the worsening economy and the events of
September 11th on an already weak advertising market, particularly in
the financial and technology segments; the company's ability to reduce
costs without harming our growth prospects; the extent to which the
company is required to perform under the guarantee to Cantor Fitzgerald
Securities and Market Data Corporation; the intense competition the
company's products and services face in the markets for financial news
and information and advertising revenues; the company's ability to
increase its circulation and advertising revenues from its
international print publications, given competition from local
publications and from other international publications; with respect to
Newswires, the rate of addition of new subscribers, particularly,
outside the U.S., and cancellations of Telerate and Bridge terminals,
and the impact of consolidation in the financial services industry; the
company's ability to achieve and maintain a diversified advertising
base for its print publications; increased competition in the market
for electronic business information and research services and Factiva's
ability to increase its market share and revenues in the face of
competition from local providers with more local content and from other
international providers; WSJ.com's ability to increase its revenues in
light of its paid subscription model; the amount of user traffic on the
company's Internet sites and the pricing of advertising on Internet
sites generally; adverse developments relating to the company's
commitments, contingencies and equity investments; potential delays in
expanding the company's newspaper page and color printing capacity;
potential increased regulation of on-line businesses; the cost of
newsprint; and such other risk factors as may have been or may be
included from time to time in the company's reports filed with the
Securities and Exchange Commission.
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