EXHIBIT 99.1
TRANSCRIPT OF FIRST QUARTER 2005 EARNINGS CONFERENCE CALL
CORPORATE PARTICIPANTS
JIM FOLLO
Martha Stewart Living Omnimedia - CFO
SUSAN LYNE
Martha Stewart Living Omnimedia - CEO
CONFERENCE CALL PARTICIPANTS
DENNIS MCALPINE
McAlpine Associates - Analyst
DOUGLAS ARTHUR
Morgan Stanley Dean Witter - Analyst
MICHAEL MELTZ
Bear Stearns & Co. - Analyst
GARY MCDANIEL
Standard & Poors - Analyst
UNIDENTIFIED PARTICIPANT
DAVID ROSEN (PH)
Graham and Dodd Value - Analyst
PRESENTATION
OPERATOR
Good morning and welcome to the Martha Stewart Living Omnimedia first quarter
2005 earnings call and webcast. All participants will be in a listen-only mode
until the question-and-answer session of the call. At the request of Martha
Stewart Living Omnimedia, this call is being recorded. Anyone with objections
should disconnect at this time. At this time, it is my pleasure introduce Jim
Follo, Chief Financial and Administrative Officer of Martha Stewart Living
Omnimedia. Sir, you may begin when ready.
JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA - CFO
Thank you. Good afternoon and thank you, for attending Martha Stewart Living
Omnimedia first quarter 2005 earnings teleconference and webcast. Also with me
today is Susan Lyne, our President and Chief Executive Officer. Susan will open
today with a strategic overview of the Company, and I will conclude with a
financial review of the first quarter and discuss the outlook for the second
quarter of 2005.
Before turning the call over to Susan, I would like to remind everybody that our
discussion today my including forward-looking statements, which can generally be
identified by the use of terminology such as "will" and "expect." Our actual
results may differ materially from those projected in these statements, and
factors that could cause such differences are discussed in our filings with the
Securities and Exchange Commission, particularly in management discussion and
analysis sections of our periodic filings and in our earnings release issued
this morning. An archived version of this teleconference and webcast will be
available on the Company's website all the www.marthastewart.com, through May
10, 2005.
And finally, this morning press release reflects the requirements of Regulation
G and other rules affecting the use and disclosure of non-GAAP financial
measures. During this call, we will discuss the measure operating income or loss
before depreciation and amortization. Additional
information regarding the measure operating income or loss before depreciation
and amortization is contained in our press release issued this morning, which is
accessible on our website, marthastewart.com, under the heading "Investor
Relations."
With that completed, I would now like to turn the call over to Susan Lyne.
Susan?
SUSAN LYNE - MARTHA STEWART LIVING OMNIMEDIA - CEO
Thank you, Jim. Good afternoon. I want to thank all of you for joining our
first quarter earnings conference call and webcast. We have had a very busy few
months here and so before we discuss our financials, I would like to address
several key announcements and why they are important to our overall strategic
business plans. But first thing's first. Since we last talked, our founder,
Martha Stewart, has returned to a tremendously warm welcome from our employees,
business partners, advertisers, and most importantly, our customers. She has
brought fresh ideas, renewed energy, and her unerring eye to all corners of the
Company, making my job easier and a whole lot more exciting. The momentum
created by her homecoming is helping us grow our business and create value for
shareholders.
I have said before that the greatest strength of this Company is its human
talent, a resource that allows us to generate a consistent flow of great,
creative products. That fact was reinforced this month when our publishing group
won two major awards: Martha Stewart Living won the 2005 -- excuse me, Martha
Stewart Weddings won the 2005 National Magazine Award for General Excellence,
and our Kids Magazine won for overall design. In addition, the Martha Stewart
Living Television Show was nominated for three daytime Emmy awards, bringing its
lifetime total to 60. The quality of our creative output is as high as it has
ever been, and maintaining that edge is a priority. We see real opportunity in
new distribution channels and new formats that will make our content more
accessible, more useful, more individualized, or more immediate, both to better
serve our current customers and to reach out to new ones.
And that brings me to two recent announcements. Last week we final finalized the
deal with SIRIUS satellite radio to create the first 24/7 radio channel for
women and their families. This new channel will allow women to access our unique
and relevant lifestyle programming whenever they choose and wherever their day
takes them. It will offer listeners a more personal and immediate interface with
Martha Stewart herself, while giving MSO on opportunity to introduce new voices
and new talent from our expert ranks. This is a 4-year deal with minimum
guarantees of $30 million and a conservative, annual EBITDA projection of $4 to
$5 million. We announced the second partnership this morning with Warner Home
Video, which will tap our rich and comprehensive television library to create a
line of DVDs targeted to women's special interests. We anticipate releasing a
minimum of 16 offerings a year beginning in fourth quarter, providing consumers
with targeted, in depth, how-to programming for every occasion or home project.
As opportunities multiply, so do the demands on our executives and creative
group to execute well and capitalize fully on each and every new venture. To
that end, we are strategically adding new talent to augment our highly capable
leadership team. In April, we named Sally Preston Senior Vice President and
Publisher of Martha Stewart Living magazine. Sally was Associate Publisher of
Better Homes and Gardens and O Magazine, and most recently, Vice President and
Publisher of Rodale's Organic Style. She has established a solid reputation as a
team builder with strong industry relationships that enable her to deliver
results, and we are confident that her experience and drive will help accelerate
our building momentum at Martha Stewart Living.
Having worked with Cyndi Stivers and followed her success with Time Out New
York, I knew that her unique blend of creative and entrepreneurial skills would
enhance our ability to grow in new directions. As an Executive Vice President
reporting directly to me, she will focus on our new business initiative,
including the SIRIUS radio channel. She has an enviable record with start-ups.
She knows how to identify and develop talent, build brand, and deliver on
consumer expectations. We are very lucky to have lured her to MSO. These events
of the last quarter all serve to reinforce key points I discussed on our last
call. I talked about the strength of our brand, its underlying values, and the
emotional bond it enjoys with our customers. Martha's return and the
tremendously warm welcome she has received speaks directly to that brand equity.
I talked about our rich content library and the opportunity they afford to
create new businesses that expand our audience and create value. The SIRIUS
radio and Warner DVD announcements are examples of way we intend to put those
assets to work to better serve our customers and create new points of entry. The
interactivity of satellite radio will enable Martha and our other experts to
answer questions and exchange ideas in more timely fashion. Our new DVD line
will deliver deeper and more targeted information on a customer's particular
area of interest, whether that be baking or gardening, planning a wedding, or
even making Halloween costumes. Both deals reaffirm the demand for our how-to
content and represent sound ways for us to monetize our brand and create value
for the long-term.
I talked as well about the extraordinarily talented and creative employees
assembled at MSO. The ASME awards and Emmy nominations only serve to reinforce
that. Significant improvements in our operating results will take time, but a
positive uptick in ad sales, a strong market for the
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new syndicated show, and the momentum created by our resent announcements lead
us to believe we are seeing early signs of a recovery. At our flagship magazine,
strong circulation and readership numbers, as well as Martha's unencumbered
return, should lead to positive page growth in the second quarter in excess of
30% and add revenue growth exceeding this amount.
While we adopt all the customary cautions on forward-looking statements, we
believe these early indicators signal a trend that will fully evidence itself in
next year's results when we have the benefit of an entire year's worth of
advertising commitments. Everyday Food continues to grow; hitting our internal
targets, increasing advertising and circulation revenue, as well as more
moderate subscriber acquisition costs should allow us to cut our investment loss
significantly.
Work is well under way to prepare for MSO's return to television. Our new
syndicated program will premier in September, and station demand has exceeded
our expectations. With a new format and live studio audience that will allow for
more interactivity, the show has already been cleared in approximately 90% of
U.S. markets. We are very enthusiastic about advertising opportunities ahead of
the upfront market in May, and expect to make a number of cross platform deals
that leverage print, broadcast, online, and our new partnership, with SIRIUS.
In the merchandising business, the Martha Stewart Everyday garden and housewares
lines have shown promising strength, while Soft Homes, particularly our five
star sheets and towels, have been soft due to pending product resets. In May we
will expand the Martha Stewart Everyday offerings to include our first line of
ready-to-assemble furniture, as well as a new, five star bed and bath program.
Before I introduce Jim Follo, I would like to close with our balance sheet,
which remains exceptionally strong with $147 million in cash and short-term
investments. This financial strength allows us to manage the Company for the
long-term and make investments in new sources of growth for our current and new
brands, our existing library, and new content, all with the focus of creating
long-term value. I look forward to sharing our progress on all these fronts in
July.
Now, I will turn the call over to Jim Follo, who will give you more detail on
our first quarter results and our outlook for the second quarter.
JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA - CFO
Thank you, Susan. Let me begin by reviewing the highlights of our first quarter
performance on a consolidated and segment-by-segment basis, before concluding
with an outlook for the second quarter of 2005. Overall company revenues for the
first quarter of 2005 were $38.7 million, compared to $44.5 million in the first
quarter of 2004. Our operating loss in the quarter was $19.8 million, compared
to an operating loss of $16.5 million in the prior year's quarter, and loss from
operations before depreciation and amortization, and amortization of non-cash
equity compensation in the quarter was $14.9 million, compared to loss of $13.4
million in the prior year's quarter.
A net loss for the 2004 quarter was $19.2 million, or $0.38 a share, compared to
loss of $19.5 million, or $0.39 a share for the 2004 quarter. Our first quarter
results are generally in line with previous guidance. Not included in our
original guidance was an employee severance cost of approximately $1.6 million,
or $0.03 a share. And finally, our full-time employee head count as of March
31st was 489, compared to 478 at year-end December 2004.
Now turning to publishing. Publishing segment revenues for the first quarter
were $25.4 million, compared to $23.9 million in the prior year's quarter. The
quarterly performance reflects the results of three issues of Martha Stewart
Living magazine, three issues of Everyday Food, two special interest
publications. In addition, we published two issues of Body + Soul. For
comparison with the 2004 quarter, we published one less special interest
publication and two issues of Body + Soul.
Publishing revenue in the quarter reflect the following. Advertising pages in
Martha Stewart Living magazine decreased approximately 12% in the quarter to 185
pages, according to MIN, with revenue declining more moderately. Circulation
revenue for Martha Stewart Living was essentially flat in the quarter. Revenues
from Everyday Food increased approximately 20% on higher subscription and
advertising revenue. Our subscription acquisition costs have also begun to
moderate, resulting in improved year-over-year operating loss, and revenue from
Body + Soul was $2.1 million in the quarter.
On the cross side, overall expenses in the segment increased $5.4 million.
Excluding Body + Soul, costs would have risen a more modest $1.3 million, more
than half of which is non-recurring severance charges. The remaining increase
was largely due to increased marketing expenditures related to MSL, part of
which relate to a change in the timing of certain direct mail campaigns.
Operating loss in the first quarter for the segment was $8.7 million, compared
to operating loss of $3.8 million in the 2004 quarter and OIDA was a loss to
$7.7 million in the first quarter of 2005, compared to loss of $3.7 million in
the first quarter of 2004.
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In television, revenues in the quarter were $0.8 million, compared to $4.2
million in the 2004 quarter. The revenue decrease is primarily due to the
absence of our daily syndicated show, which stopped airing in syndication in
mid-September 2004. Costs in the segment for the quarter were $3.0 million,
compared to $6.1 million the 2004 quarter, as a result of lower production
activity related to the syndicated show. The current quarter includes
approximately $0.5 million dollars of non-recurring professional fees.
In the second quarter of 2005, we will begin to staff up the segment as we
prepare top launch our new, daily syndicated show, although a certain portion of
these expenses will be deferred from matching against future revenues. Operating
loss was $2.3 million in the 2005 quarter, compared to operating loss of $1.9
million in the 2004 quarter. In merchandising, revenues were $9.4 million in the
quarter, compared to $10.8 million in the prior year's quarter. The current
year's quarter reflects royalty revenue from Kmart based upon actual product
sales as well as $2.1 million representing the pro-rata portion of revenue
resulting from annual minimum guaranteed revenue provisions in the agreement.
Overall, sales of Martha Stewart Everyday product at Kmart on a comp store, comp
category basis, decreased 6.2% in the quarter, with weakness in Soft Home
partially offset by strength in garden and housewares. Expenses in the segment
were lower due to lower compensation related costs. Operating income was $5.8
million for the first quarter of 2005, compared it $6.5 million for the first
quarter of 2004. OIDA was $6.1 million for the first quarter of 2005, compared
to $6.7 million in the first quarter of 2004.
Internet direct commerce revenues in the first quarter were $3.1 million,
compared to $5.6 million in the prior year's quarter. The results for the
quarter reflect a final effort at liquidating our remaining product inventory.
Accordingly, going forward, we will no longer be receiving revenues from product
sales from the catalog for living. Future revenues will continue to include both
advertising revenue and product sales from Martha's flowers products. Operating
loss was $1.5 million for the first quarter of 2005, compared to $2.7 million
for the first quarter of 2004, and OIDA loss was ($1.2) million for the first
quarter of 2005, compared to ($2.4) million in the first quarter of 2004.
Going forward, we expect our losses to decline on a quarter-over-quarter basis
throughout the remainder of year as we reduce our cost structure, principally in
technology employment related costs, while we expect a level of advertising
revenues to increase over current levels. Corporate expenses were $13.1 million
for the first quarter of 2005, compared to $14.6 million in the first quarter of
2004. Corporate overhead before depreciation, amortization, and non-cash equity
compensation was $9.9 million for the first quarter of 2005, compared to $12.0
million in the first quarter of 2004. The reduction was principally a result of
lower professional fees incurred in the quarter. The increase in the
amortization of non-cash equity compensation principally relates to the costs
associated with new employee grants. And amortization of non-cash stock
compensation was $3.2 million in the quarter, compared to $1.5 million in the
first quarter of 2004. Significant components for the increase relate to the
amortization of a resent employee grant, as well as employee severance up above
$600,000.
I would now like to wrap up with a discussion of the outlook for the second
quarter of 2005. For the second quarter, we expect revenues to approximate $42
to $44 million. Operating loss for the quarter is expected to approximate $31
million, including a non-cash charge of $15 million resulted from the expected
vesting of one-third of an initial 2.5 million grant of warrants to Mark
Burnett. The valuation of these warrants is based upon the share price on the
date of vesting, and accordingly, it is difficult to project with precision.
However, each $1 movement in our stock price impacts the valuation by
approximately $800,000.
Other factors contributing to the quarterly results within each segment are as
follows. For publishing, revenues are expected to approximate $30 million. OIDA
losses are expected to be approximately ($4) to ($5) million. The quarterly
results will reflect the following: higher advertising and circulation revenue
from Martha Stewart Living magazine resulting from higher ad pages and
subscription copies sold partially offset by higher subscription acquisition
costs. Body + Soul revenues will approximate $2.5 million, and operating loss
will approximate $1.5 million. We will continue to see revenue growth and
reduction of losses in Everyday Food. Revenues will increase as a result of
higher circulation and advertising revenues, while expenses will be lower as a
result of lower subscription acquisition costs.
The publishing schedule for the second quarter of 2005 is as follows: three
issues of Martha Stewart Living, three issues of Everyday Food, three issues of
Weddings, one issue of Kids, and two issues the Body + Soul. Television revenues
are expected to be less than $1 million, with an OIDA loss of approximately
($2.0) million. Merchandising revenues in the quarter are expected to
approximate $10 million, with OIDA being approximately $6.0 to $6.5 million.
We expect Internet/Direct Commerce revenues to approximate $2 million for the
quarter, and OIDA loss to approximate $1.0 million, and corporate expenses will
approximate $10 million, including non-recurring costs of approximately $0.5
million. An amortization of non-cash equity compensation will approximate $3.0
million, excluding of impact of the vesting the warrant issued to Mark Burnett
as previously discussed.
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This concludes the formal portion of our presentation. I would now like to turn
the call over to the conference call operator for the question-and-answer
portion of the session. Thank you.
OPERATOR
Thank you. [OPERATOR INSTRUCTIONS]. Our first question is coming from Dennis
McAlpine from McAlpine Associates.
QUESTION AND ANSWER
DENNIS MCALPINE - MCALPINE ASSOCIATES - ANALYST
Thank you and good morning. Would you talk about what you anticipate you can do
on the cross placement of advertising sales which you referred to in your
comments? How big a factor is this apt to be going forward?
SUSAN LYNE - MARTHA STEWART LIVING OMNIMEDIA - CEO
It is a significant factor for us. What we have seen is that there is an
enormous amount of interest, in the new syndicated show and a lot of interest in
the ability to create programs that maximize the impact of an advertiser's
message through different media. I believe we are the only company right now in
this lifestyle arena that is able to do this kind of cross marketing, and it is
a very valuable tool for us at this moment.
DENNIS MCALPINE - MCALPINE ASSOCIATES - ANALYST
And on Martha Stewart living, Jim, could you repeat about what you said about
advertising and circ revenues for the second quarter?
JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA - CFO
We are expecting advertising pages to be up approximately 30% and revenues to
be up more than 30%. We are also expecting circulation revenue of Martha Stewart
Living to increase year-over-year, principally on the strength of subscription
growth in the quarter. We have seen very positive responses to direct mail
campaigns over the last six months, and that will yield positive revenue growth
in the second quarter from subscriptions.
DENNIS MCALPINE - MCALPINE ASSOCIATES - ANALYST
Does that foreshadow a prospective increase in rate base going forward at the
end of the year?
SUSAN LYNE - MARTHA STEWART LIVING OMNIMEDIA - CEO
Yes, it does. We are anticipating a rate-based increase. I am not going to give
you a definitive number right now, but we fully anticipate to raise the rate
base in January.
DENNIS MCALPINE - MCALPINE ASSOCIATES - ANALYST
And do you look for a CPM increase on top of that?
SUSAN LYNE - MARTHA STEWART LIVING OMNIMEDIA - CEO
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Yes, we do.
DENNIS MCALPINE - MCALPINE ASSOCIATES - ANALYST
Thank you.
OPERATOR
[OPERATOR INSTRUCTIONS]. Our next question is coming from Douglas Arthur of
Morgan Stanley.
DOUGLAS ARTHUR - MORGAN STANLEY DEAN WITTER - ANALYST
Susan, I am wondering if you can make any, sort of, 50,000 foot and above
comment on any opportunities and discussions about Sears and expanding into the
bigger -- the larger forming network there? And then Jim, on the cash position,
how much of the -- how much was cash boosted in the quarter by the Kmart
payment, and any comments as you invest in some of these new products where you
think the net cash position goes as the year evolves? Thanks.
SUSAN LYNE - MARTHA STEWART LIVING OMNIMEDIA - CEO
I cannot really tell you very much more about the Sears relationship except
that we are having ongoing discussions with them, and when we have something to
report, we will do that.
JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA - CFO
As far as the cash in the quarter, the amount received in the quarter from
Kmart, which included both the quarterly earned royalties for the quarter ended
January and a true-up of the amounts owed onto the minimum guaranteed provision,
was $25 million. So our cash balance in the quarter reflects a $25 million
receipt. That is not fully -- that is not really fully incremental because as I
said, the regular quarterly payment came in the quarter as well. We also had
some positive impact from some option exercises in the quarter, and that totaled
about $6 million; both of those are reflected in the cash balance.
I think you also asked that where the cash balance goes from here. Difficult to
project, I mean, obviously, we are expecting to have a loss in the second
quarter, the fourth quarter. And we do see positive trends throughout the
remainder of the year; difficult to quantify at this time. The fourth quarter,
as you know, includes a very large non-cash revenue from the Kmart agreement,
which we will see in early 2005. But I think it is safe to say we will likely be
a net user of cash between now and the end of the year.
DOUGLAS ARTHUR - MORGAN STANLEY DEAN WITTER - ANALYST
And just as a follow-up on the ad page, ad revenue outlook for living in the
second quarter, I guess, perhaps you're being conservative, but the loss
guidance in publishing for the second quarter is -- notwithstanding all the
investments you're making in the new product -- but it's a little surprising
given the ramp up in ad revenue at the living magazine. I am not sure if there
is anything that you can add to that. Any drill down on what categories in the
living are coming back the fastest? Thanks.
SUSAN LYNE - MARTHA STEWART LIVING OMNIMEDIA - CEO
Let me start with the last part of that. I think the categories where we are
seeing the most activity are food, automotive, toiletries, household
furnishings, computers; those are our key areas for us. I wanted to reinforce
something that Jim said, because I saw from speculation this morning that we
were driving page growth for second quarter with discounting, and that is
absolutely not the case. We are not -- not -- discounting pages.
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The goal here is to increase page and revenue per page. And for second quarter,
we are seeing higher net revenue per page. Remind me what your other question
was? It was about --?
DOUGLAS ARTHUR - MORGAN STANLEY DEAN WITTER - ANALYST
Profitability.
SUSAN LYNE - MARTHA STEWART LIVING OMNIMEDIA - CEO
Okay. One thing I would say here is that there are some significant investments
in circulation. This is not to meet our current rate base, but it is because we
are seeing real strengths in our circulation, our direct mail at this moment,
and see an opportunity to grow the rate base, organically, and at a level that
we will be able to sustain for the long-term. So it is a valuable and investment
for us, particularly as we see advertising coming back.
JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA - CFO
And let me also add that the Body + Soul acquisition, which took place in
August of last year, will contribute about, somewhere in the neighborhood of
$1.5 million as a loss in the quarter. And to quantify what Susan is talking
about, our direct mail -- direct acquisition costs for circulation in the
quarter will be up, year-over-year, about $1 million.
DOUGLAS ARTHUR - MORGAN STANLEY DEAN WITTER - ANALYST
Great. Thank you.
OPERATOR
Thank you. Our next question is coming from Michael Meltz of Bear Stearns.
MICHAEL MELTZ - BEAR STEARNS & CO. - ANALYST
Hi. Can you tell us the DVD agreement with Warner? Is there a minimum payment
there or is there some type of -- can you just discuss the revenue share you may
have? And then, secondly, can you quantify the Everyday Food, the loss in Q1 and
what you are expecting for '05? And then, thirdly, just given your point on
discounting, can you just clarify what, in Q1, at the publishing group, what
total ad revenue and circ revenue, what the performance was? And then the same
for Martha Stewart magazine. I'm sorry for the several questions but --
SUSAN LYNE - MARTHA STEWART LIVING OMNIMEDIA - CEO
That is okay. I will just take the first one. There is a meaningful upfront
payment from Warner Home Video, which is recoupable against sales, and a very
significant royalty on that. This is a new category, really, for DVDs, but it is
worth noting that every major home entertainment company bid for this business.
So we have high hopes for it but this is really something we will be booking
against sales.
JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA - CFO
Michael, I think you asked some questions regarding Martha Stewart Living in
the first quarter. Our circ revenue for Martha Stewart Living in the first
quarter was essentially flat, year-over-year, and our ad revenue, reflecting
slightly lower pages, was down about 7%.
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MICHAEL MELTZ - BEAR STEARNS & CO. - ANALYST
And for the group?
JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA - CFO
The group. The consolidated group?
MICHAEL MELTZ - BEAR STEARNS & CO. - ANALYST
Yes.
JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA - CFO
Give me a second. Overall, revenues were, obviously, for the quarter, were up
reflecting Body + Soul acquisition. Our total circ revenue was up about 5%, and
our ad revenue was up about 7%.
MICHAEL MELTZ - BEAR STEARNS & CO. - ANALYST
Okay. And Susan, getting back to your point on meaningful upfront payment, is
that -- is that comparable to what you're expecting for SIRIUS on an annual
basis or can you just quantify for us?
SUSAN LYNE - MARTHA STEWART LIVING OMNIMEDIA - CEO
No, it is not. And I think it is early for us. The upfront payment, as I said,
is significant but it is not something that we will be booking immediately. It
is really too early for us to anticipate what level of sales we will have. And I
could -- if I gave you guidance on it, I could be erring on the upside or the
downside. So it is a big opportunity for us. I think that we will be offering
something that is not currently in the marketplace, and we do know that we have
an avid and active audience and also have numerous media properties to be able
to promote the new line. So we are going into this with the ability to create
awareness for this new product line that should give us a big head start here.
MICHAEL MELTZ - BEAR STEARNS & CO. - ANALYST
Okay. And Everyday Food?
JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA - CFO
I am sorry, the question on Everyday Food?
MICHAEL MELTZ - BEAR STEARNS & CO. - ANALYST
What was the loss in the first quarter?
JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA - CFO
The loss in the first quarter.
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MICHAEL MELTZ - BEAR STEARNS & CO. - ANALYST
And what you are expecting for '05.
JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA - CFO
The loss in the first quarter for Everyday Food was about $1 million.
MICHAEL MELTZ - BEAR STEARNS & CO. - ANALYST
And full - ?
JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA - CFO
Full year, I would say slightly higher on a run rate basis than that.
MICHAEL MELTZ - BEAR STEARNS & CO. - ANALYST
So $4 to $5 million?
JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA - CFO
I would say five. Five to six.
MICHAEL MELTZ - BEAR STEARNS & CO. - ANALYST
Okay. Thank you.
OPERATOR
Thank you. Our next question is coming from [Steve Gidumal] from Merrill Lynch.
UNIDENTIFIED PARTICIPANT
Hi. Actually, it is Steve Gidumal from Capital. I do not know how that
happened. My question is in your capital -- in excess of par it went up by $18
million during the quarter, though your unamortized restricted stock loss went
up by -- went down, I guess, by $8 million. Is that saying that there was $18
million of option exercise? You just said earlier that it was $6 million, so I
am just trying to correlate those two numbers. I mean, was that a source -- I
know the $6 million increase was a source of cash, but is it really -- was it 18
million? Could you just clarify that?
JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA - CFO
The question you have, I mean, the option exercises has obviously had a
reasonable impact on our capital access to par. The unamortized stock
principally relates to a grant that took place January 1st, which is our annual
grant to employees.
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UNIDENTIFIED PARTICIPANT
So that you take a hit when you granted, in a sense?
JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA - CFO
Well, in the unamortized, it does.
UNIDENTIFIED PARTICIPANT
Okay.
JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA - CFO
That is where it goes immediately upon grant and then it gets amortized in --
over time.
UNIDENTIFIED PARTICIPANT
Right. That makes sense to me. But the capital in excess of par going up $18
million, roughly $18 million, is that strictly because of the option exercise or
is that -- how does one look at that?
JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA - CFO
That is substantially driven by option exercises in the quarter.
UNIDENTIFIED PARTICIPANT
So that's -- is that -- so is that mostly cash or is that --?
JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA - CFO
Yes.
UNIDENTIFIED PARTICIPANT
So --
JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA - CFO
I am sorry; the total cash from option exercises was $6 million.
UNIDENTIFIED PARTICIPANT
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Okay.
JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA - CFO
Let me just -- just give me one second here.
UNIDENTIFIED PARTICIPANT
I am just trying to reconcile the capital in excess going up, versus the six,
that is all.
JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA - CFO
The increase related -- $16 million of the increase related to issuances in
connection with option exercises and with short bid stock. As far as the cash
goes, I do not have the exact number, but the net cash of the company was $6
million. So the difference between the 6 and the 16 is the 10 million that went
into the unamortized restricted stock line on our balance sheet.
UNIDENTIFIED PARTICIPANT
And was that a decrease to it or --?
JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA - CFO
Oh, it's a decrease to a -- it's a --
UNIDENTIFIED PARTICIPANT
Decrease it a negative number?
JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA - CFO
Yes. That is right.
UNIDENTIFIED PARTICIPANT
Okay. So it is a positive?
JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA - CFO
That is right.
UNIDENTIFIED PARTICIPANT
15
Okay. Okay. The thing about that, but I think the answer is clear, I just think
about it. Okay. Then, in the projections that you gave us earlier, is there
going to be, in fiscal '05, any revenue that will be attributed to the new
"Apprentice" show, the "Martha Stewart Apprentice" show?
JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA - CFO
Minimal.
UNIDENTIFIED PARTICIPANT
Minimal. Okay. So there is not really that much direct revenue from the show?
JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA - CFO
That is correct.
UNIDENTIFIED PARTICIPANT
Okay.
SUSAN LYNE - MARTHA STEWART LIVING OMNIMEDIA - CEO
Let me make clear that there will be revenue in '05 for the syndicated show.
The syndicated show is the television programming we own. "The Apprentice" is a
show we are looking at as an opportunity to create awareness for the brand our
products and all we do, with an audience that may not watch daytime television
and may not be familiar with our magazine. So it is a different proposition for
us.
OPERATOR
Thank you. Our next question is coming from Gary McDaniel of Standard & Poors.
GARY MCDANIEL - STANDARD & POORS - ANALYST
Hi. Good afternoon. Just a couple of questions on SIRIUS. I wonder if you could
run down what the cost basis is going to be for that, and if we expect -- I
think it was $4 to $5 million in EBITDA for 2005 -- if we expect those numbers
to be similar going forward? And also, what the rationale is for doing a radio
show when so much of the content is really visual in nature.
SUSAN LYNE - MARTHA STEWART LIVING OMNIMEDIA - CEO
Okay. Let me take those ones at a time. The agreement with SIRIUS includes
their covering the vast majority of our costs to produce this. Our
responsibilities lie primarily in delivering our expert voices and personnel and
our library product where it seems appropriate. So as I said, the EBITDA numbers
we gave you are conservative estimates for us. Just covering the fact that we
know that we will want to do a certain amount of development and make sure this
product is great.
But, certainly, we do not expect increased costs in out years. The opportunity
that I think radio provides for us is, well, they are numerous. One is that it
is a very intimate medium and it is a medium people can access in their cars
while they are doing other things. It is a way to extend the relationship we
already have with our customers, and I think to reach people who may work, may
have very hefty schedules but are still very interested in all the expert advice
and home and lifestyle arenas that we have expertise in.
16
So it is a way for us to be able to do both inspirational and informational
programming and even to get into some areas that we are not able to cover,
except in minor ways, in our magazine. We've got limited pages there, but -- and
our audience expects us to cover certain things, month-in, month-out. This gives
us a way to be able to broaden the mix a little bit, and to, as I said, to
introduce some new voices to the mix.
There are a lot of people at this company with phenomenal expertise in pet
keeping, in collecting, in gardening, and many other arenas who our audience
knows mainly by their bylines. And being able to develop some new voices, along
with making Martha, herself, available on a much more intimate basis to our
customers, we think is enormously valuable.
JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA - CFO
And just to clarify, the EBITDA number that Susan gave was 4 to 5, is an annual
number. We'll be watching this thing, like in our third quarter, so that will be
pro rated for part of the year in 2005, and in 2006 you should see a full year
impact from that program.
GARY MCDANIEL - STANDARD & POORS - ANALYST
Thank you.
OPERATOR
Thank you our next question is coming from [David Rosen of Graham and Dodd
Value].
DAVID ROSEN - GRAHAM AND DODD VALUE - ANALYST
Good morning. Quick question on Kmart because we are not terribly familiar with
the contract. We understand it goes to 2010. Is there any way if Kmart reduces
its number of stores dramatically or anything that they can get away with not
paying you the minimum payment, or are they obligated until the fruition of the
contract?
JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA - CFO
The contract is our stated amount. There is no performance clause or store
numbers or anything that would allow that contract to not be in full force until
January 2010.
DAVID ROSEN - GRAHAM AND DODD VALUE - ANALYST
Okay. Great. Thank you very much.
OPERATOR
Our final question is coming from Dennis McAlpine from McAlpine Associates.
DENNIS MCALPINE - MCALPINE ASSOCIATES - ANALYST
Yes. Could you comment on what the overall advertising revenue is for Martha
Stewart living Omnimedia, the company, and how that compares to last year? And
then, lastly, on "The Apprentice", is it safe to say that if the number of
episodes in that arc were reduced that that would have no impact on you, or
minimal financial impact?
17
JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA - CFO
I am sorry; can you repeat the first question? You were asking a question about
advertising revenue.
DENNIS MCALPINE - MCALPINE ASSOCIATES - ANALYST
Yes. I was curious, as you go through the entire company, what is total
advertising as either a dollar amount or a percentage amount and how that's
changed?
JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA - CFO
Well, I would say our total ad revenue, relative to our publishing revenues, is
somewhere around -- ad revenue, I would say, is about 40% of our total revenue
in our publishing group.
DENNIS MCALPINE - MCALPINE ASSOCIATES - ANALYST
How about overall?
JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA - CFO
Well, I mean, that's -- right now, I mean -- ad revenue is only in our
publishing segment in the first quarter of this year. In the future, as we get
into the fourth quarter, advertising will be a more relevant number in TV, which
will get a meaningful percentage of their revenues from advertising. Our TV
program will derive revenues from two sources: advertising revenue, which we
will sell, and license fees, which were paid to us by the stations that carry
the program. That number is a percentage -- advertising will grow as a
percentage of our total revenue once we get into the fourth quarter.
DENNIS MCALPINE - MCALPINE ASSOCIATES - ANALYST
Okay. And "The Apprentice" impact?
SUSAN LYNE - MARTHA STEWART LIVING OMNIMEDIA - CEO
Could you explain what is it you are asking a little bit more?
DENNIS MCALPINE - MCALPINE ASSOCIATES - ANALYST
Yeah, I am sorry. I think everybody is agreed that "The Apprentice" does not
generate any hard revenues to Martha Stewart Living, the company. And,
therefore, if the number of episodes in Martha Stewart living or the "Martha
Stewart, The Apprentice" were reduced, that would have no impact on the company
then?
SUSAN LYNE - MARTHA STEWART LIVING OMNIMEDIA - CEO
That is correct.
JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA - CFO
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That is correct.
DENNIS MCALPINE - MCALPINE ASSOCIATES - ANALYST
Thank you.
OPERATOR
Thank you. This does conclude today's teleconference. You may disconnect your
lines at this time and have a great day. Thank you.