EXHIBIT 99.1
TRANSCRIPT OF THIRD QUARTER 2005 EARNINGS CONFERENCE CALL
CORPORATE PARTICIPANTS
HOWARD HOCHHAUSER
Martha Stewart Living Omnimedia Inc. - VP Finance and IR
SUSAN LYNE
Martha Stewart Living Omnimedia Inc. - President, CEO
JIM FOLLO
Martha Stewart Living Omnimedia Inc. - CFO
CONFERENCE CALL PARTICIPANTS
DENNIS MCALPINE
McAlpine Associates - Analyst
DOUGLAS ARTHUR
Morgan Stanley Dean Witter - Analyst
MICHAEL MELTZ
Bear Stearns - Analyst
ROBERT ROUTH
Jefferies & Company - Analyst
GARY MCDANIEL
Standard & Poor's - Analyst
WILLIAM DREWRY
Credit Suisse First Boston - Analyst
PRESENTATION
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OPERATOR
Good morning and welcome to the Martha Stewart Living Omnimedia third
quarter 2005 earnings release conference call and webcast. All participants
will be on 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. [OPERATOR INSTRUCTIONS]
At this time, it is my pleasure to introduce Howard Hochhauser, Vice President
of Finance and Investor Relations of Martha Stewart Living Omnimedia. Sir, you
may begin when you are ready.
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HOWARD HOCHHAUSER - MARTHA STEWART LIVING OMNIMEDIA INC. - VP FINANCE AND IR
Thank you very much. And good afternoon, everyone. Welcome to our conference
call for the third quarter 2005 results. On the call with us today are Susan
Lyne, our President and CEO; and Jim Follo, our Chief Financial and
Administrative Officer.
Our prepared remarks should take about 20 minutes then we'll open it up to
questions. Let me remind you, if you prefer to listen on the web, you can go to
Marthastewart.com and click on the Investor Relations link and follow it to the
webcast. An audio archive will be available on Marthastewart.com later today and
we will leave it there for a couple of weeks and you can access it at your
convenience.
Now before turning the call over to Susan, I will remind you that our
discussions will contain forward-looking statements, which are made pursuant to
the Safe Harbor Provision of the Private Securities Litigation Reform Act of
1995, as amended. These statements are not guarantees of future performance and
involve certain risks and uncertainties, which are difficult to predict. Actual
future results and trends may differ materially from the forecasts and
forward-looking statements due to a variety of factors. Now let me turn things
over to Susan.
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SUSAN LYNE - MARTHA STEWART LIVING OMNIMEDIA INC. - PRESIDENT, CEO
Thank you, Howard. Good afternoon. And thank you all for joining us on our
third quarter earnings conference call. It has been almost a year since I joined
MSLO. I want to start by reviewing our objectives for 2005. Recognizing that a
full recovery would take time, the company set five goals for the year that we
believed would create momentum in the short-term and position the company for
growth, going forward. They were to bring advertisers back, relaunch the daily
television show, strengthen the management team through strategic hires, put our
libraries to work and finally, make our how-to content available on new
platforms and in new formats. All five have been met and while our third quarter
results are below where we would like them, they are ahead of expectations and
better than prior year.
Overall, the strongest driver in the quarter was our core Publishing business.
As I said, restoring advertiser confidence and growing revenues is a top
priority. With the re-energized sales team, there has been new and past clients,
advertising has rebounded beyond even our own expectations.
At our flagship publication, Martha Stewart Living, third quarter ad pages grew
48% and are currently expected to double in the fourth quarter. The stronger --
the strong response from advertisers during planning season means we will go
into 2006 with significantly more confidence.
Our circulation trends are equally strong. The direct mail response rate is at
record high levels, and correspondingly high renewal rates confirmed the bond
with our readers. As a result, we are increasing the rate base of Living,
effective with the January 2006 issue.
Television, more specifically, a daily syndicated show, was our second priority
this year largely because of its visibility and resulting impact across the
business. Initial viewer response to the new MARTHA show has been positive. But
results for the first five weeks came in under planned. The show has bettered
its time period by 17% in metered markets and the fact that it is performing
very strongly in some key markets is encouraging. There is a clearer sense of
what viewers respond to, we have been tweaking the format and the promotions to
drive more consistent results. We have a way to go yet to meet our budgeted
expectations, but we are encouraged that both household and demo ratings have
been moving upward in each of the last two weeks.
We already see the benefits of Martha's return to TV across other segments of
our business. Web traffic is up 50% since the launch. Online subscription orders
have doubled. And The Martha Rules, the first of two new books, will debut
Sunday on the New York Times bestseller list at number five in advice how-to.
The sales of our Martha Stewart Everyday products at K-Mart have also improved
since our September 12th launch.
I am not going to spend time on the third goal, except to say that with the
addition of several key executives to an already strong creative management
team, we have a truly exceptional management group in place at the company
today.
The final two objectives on our list have driven a rapid string of
announcements, particularly over the past few months. I want to spend a moment
on the strategic context for these initiatives. MSLO is, first and foremost, a
content company. We are the leading content company in home and lifestyle how-to
with deep libraries and an enviable team of creative experts constantly
producing new ideas, information, templates and design.
In the decade and a half since Martha Stewart Living launched the Lifestyle
category, the explosion of new technologies and new platforms has created both
opportunities and demand. Opportunity, because great content will always be
valuable. Demand, because consumers increasingly expect access to information
and ideas on their own timetable and in the format of their choice. It is clear
that we have to take advantage of this multi-platform universe if we want to
remain the leading how-to lifestyle brand.
We looked at many opportunities and chose to start with DVDs and satellite radio
because we believe they would be immediate EBITDA contributors. I should note
that, while satellite radio is a guaranteed cash flow stream, it is too early to
gauge the success of our recently launched DVD program. In both cases, we are
enormously proud of the execution. They are unique in their categories, thanks
to the company's strong, brand-savvy creative management team.
Going forward, the Internet offers the greatest opportunity, given our assets
and capabilities. But to make it a real revenue driver, we have to offer more
than repurposed content. To avoid significant investment funding, we are
following a three-stage plan to first, upgrade our navigation and search to
maximize revenue on our current site, move towards parity with our competitors
and finally, deliver options and tools that enable users to interact with our
content in a unique way. I will spend more time on these plans on our Q4 call.
With the flow of ad dollars to the web and new research showing women 40-plus to
be one of the fastest growing user groups, developing our Internet business is
one of our top priorities for '06.
MSLO is more than a content company; it is also a product company, with a
merchandising segment that runs on an IP model. We oversee design and branding,
while our partners handle assortment, inventory and manufacturing. While the
K-Mart contract accounts for about 90% of our current business, we believe we
can expand the segment with new product lines and new channels of distribution.
Since bringing on a new president of merchandising in May, we have looked hard
at the opportunities; sizing markets, researching consumer attitudes and
assessing potential partners. Along the way, we have met with many companies
looking to partner with us. The vast majority have not met the guidelines we set
for ourselves. Is it a brand fit? Will it feel right to our customer? Is there a
marketplace need? Does it have strategic value for the company as a whole? And
is the potential return worth the investment of our time and resources?
The KB Home initiative, however, met every one of those measures. It is an ideal
partnership, matching our inspirational brand with one known for quality, value,
and innovation. With stylistic input on elevations, floor plans and materials,
we believe we can add significant value to the homes KB builds. And for the
first time, we will be able to bring together all of our products in the model
homes to create a total experience for our customer. It will also be a
laboratory to test concepts and products, going forward. Our guarantees will, at
the very least, cover costs on the program and in success; it could be a high
margin driver for the merchandising segment.
MSLO will continue to define and lead the Lifestyle category. Our team of
creators will continue to bring forward imaginative ideas and ingenuous
solutions that make daily life more enjoyable, more functional, more beautiful,
and even more fun. And we will continue to explore and capitalize on the
proliferating opportunities to deliver that content in new and evermore engaging
ways. We are committed not just to turning around this company, but to seeing it
realize its full potential. Investing in the future, will however; be done with
our responsibilities to shareholders at the forefront -- of all we do. To that
end, we expect our results will show strong year-over-year improvements in the
fourth quarter and for the full year. Now, I will turn the call over to Jim
Follo. Jim?
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JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA INC. - CFO
Thank you, Susan. In the third quarter, we continue to build on recovery with
year-over-year improvements in our revenues and lower OIDA losses. The
Publishing segment grew 24% -- Publishing revenue growth at 24% was the driver
of our results, with improvements in advertising pages and rates per page, as
well as strong circulation numbers. The fourth quarter numbers will improve even
further, with ad pages in Martha Stewart Living up over 100%.
Accordingly, despite some softness in Television and higher corporate expenses,
we remain on track with our previous guidance of breakeven in the second half of
the year or OIDA of $11 million in the fourth quarter.
Before discussing the details behind our fourth quarter guidance, let me discuss
certain expense items, which impacted our third quarter results. Our performance
in the quarter was slightly ahead of our guidance, due largely on the strength
of the Publishing segment, with pages up 48%. Offsetting some of the increase
was higher corporate spending on research and fees related to retaining some new
members of management.
The quarter also included a non-cash charge of $10.8 million, or $0.21 per
share, associated with the vesting of warrants granted in connection with the
airing of The Apprentice: Martha Stewart. This charge represents half of the
second tranche of options that vested on the air in the first episode. And the
pro-rata portion of the remaining half that will vest upon the last airing.
These warrants have not been exercised and are not included as part of our share
count as of September 30th.
Let me now provide you with fourth quarter guidance on a segment basis. For the
fourth quarter, we expect to report OIDA of $11 million on revenue of
approximately $80 million. Our operating loss is expected to be breakeven. We
are assuming that an additional 400,000 shares out of a 2.5 million grant of
warrants related to the television venture will vest in the fourth quarter. The
valuation of these warrants is based upon the share price and the date of
vesting, and accordingly, it is difficult to project with precision. Each dollar
movement in our stock impacts the valuation by approximately $675,000.
Factors contributing to the fourth quarter results within each segment are as
follows. For Publishing, fourth quarter revenues are expected to be
approximately $40 million, while OIDA is expected to be breakeven; a
year-over-year improvement of $11 million in the segment. Revenues and operating
results will reflect higher advertising and circulation revenue for Martha
Stewart Living magazine resulting from higher ad pages and subscription copies
sold, as well as continued reductions in losses in Everyday Food due principally
to lower subscription acquisition costs. This segment will also benefit from
revenue related to our new radio program on SIRIUS and the benefits of two new
books.
Television revenues are expected to be approximately $11 million, as we benefit
from a full quarter with the new syndicated show and the launch of our DVDs.
OIDA loss for the third quarter will approximate $1 million. Let me help size
the DVD impact in the fourth quarter. While it is too early to talk about sales
trends, based on the number of copies printed, we expect to have revenue of
approximately $0.5 million to $1 million, and unit sales of 150,000 to 300,000.
Merchandising revenues in the quarter are expected to be approximately $28
million, while OIDA will be approximately $23.5 million. Revenues in the quarter
will include a true-up payment related to our minimum royal guarantees with
K-Mart of approximately $16 million.
We expect Internet/Direct Commerce revenues to approximate $2.5 million for the
quarter and OIDA to approximate breakeven.
We expect corporate expenses to approximate $11.5 million, and amortization of
non-cash compensation should approximate $3.5 million, excluding the impact of
vesting of warrants issued for Mark Burnett, which will approximate $5.5
million.
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.
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OPERATOR
Thank you. [OPERATING INSTRUCTIONS] Our first question is coming from Dennis
McAlpine with McAlpine Associates.
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DENNIS MCALPINE - MCALPINE ASSOCIATES - ANALYST
Thank you. Would you talk about the potential of make-good situations on the
daytime show and whether those can be taken care of through other medium, i.e.,
the magazines or something else? And in regard to that, what sort of
cross-selling have you done of the advertising into other sectors?
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SUSAN LYNE - MARTHA STEWART LIVING OMNIMEDIA INC. - PRESIDENT, CEO
Well, let me take those one at a time. We would not be able to move make-goods
to other media. That is not feasible. But at current demo ratings, we will have
some make-goods, clearly. But where I think we guided last call, on the TV
segment, that it would be a $45 to $50 million business, ex our DVD business. If
we were at current demo ratings, it would be about a $40 to $45 million
business, and essentially breakeven.
So, look, we are -- we are very focused on improving ratings. I think we have
learned a lot since the show launched. This is -- because it was a live show.
There was only so much we could plan for before the launch but even the tweaking
we have done since September 12th has already had an impact. We -- we realized
that we were trying to cram too much into shows, that we needed to let segments
breathe a little bit more. We have added more how-to, more take-aways to every
show because I think people love the idea that -- wow, why didn't I know that?
And really feeling like they have learned something on every show. Martha is
great. She is in her element in this format.
So we are very positive about the program itself. And I do think that with some
additional tweaking -- we are also really trying to promote later segments in
the show throughout the early part of it so people realize what is coming up and
- -- and will stay through the entire program. And we are trying to do earlier
promotion of our special shows -- when we do a wedding show, or a special
holiday show, we are trying to alert audiences earlier than -- than we initially
were.
But as I said, at current demo ratings, this is about a $40 to $45 million
business, and breakeven EBITDA.
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DENNIS MCALPINE - MCALPINE ASSOCIATES - ANALYST
And the amount of cross-selling between various segments of the company?
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SUSAN LYNE - MARTHA STEWART LIVING OMNIMEDIA INC. - PRESIDENT, CEO
We have done a number of large deals across both Publishing and Television,
with a little bit of Internet sale in there too. I do think that the -- the fact
that we had the TV show, has actually helped us to drive these very strong
Publishing ad sales results. So in that sense, it has had a halo effect on the
other parts of our business. In addition to the halo effect I talked about
earlier.
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DENNIS MCALPINE - MCALPINE ASSOCIATES - ANALYST
One last thing, on the Publishing side, at what point do you get back into
profitability on Martha Stewart Living? Or is it all just the other magazines
that are dragging it down at this point?
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JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA INC. - CFO
Well, no, as I said, our fourth quarter will be breakeven. Martha Stewart
Living, actually, in the third quarter was actually profitable. We showed a
relatively small loss in the quarter in the Publishing segment of about $1.8
million -- Martha Stewart being profitable. We are continuing in investment
mode, as I said in Everyday Food and Body and Soul, so we are already profitable
in Martha Stewart Living.
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DENNIS MCALPINE - MCALPINE ASSOCIATES - ANALYST
Thank you.
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OPERATOR
Our next question is coming from Douglas Arthur of Morgan Stanley.
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DOUGLAS ARTHUR - MORGAN STANLEY DEAN WITTER - ANALYST
Yes, two questions. The decline in royalty revenue from sales at K-Mart -- can
you talk about same-store trends and elaborate a little bit on the -- I think
you made reference in the press release to continued softness in the Home
category. Where do you see the varying different product lines playing out here
at K-Mart near- term? And then, Jim, can you just update us on the number of
magazine issues year-over-year in the fourth quarter? Thanks.
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JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA INC. - CFO
Why don't I just give you the magazine numbers. In the -- I'm sorry, the fourth
quarter you asked me?
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DOUGLAS ARTHUR - MORGAN STANLEY DEAN WITTER - ANALYST
Yes.
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JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA INC. - CFO
In the fourth quarter we plan on for -- in '05, we plan on having our regular
three issues of Martha Stewart Living, one of Baby Kids. We will have one
holiday-related special issue, two issues of Everyday Food and two of Body and
Soul. So incrementally in the quarter, we will have one last issue of Baby Kids
and all the other schedules will actually be the same.
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SUSAN LYNE - MARTHA STEWART LIVING OMNIMEDIA INC. - PRESIDENT, CEO
I can answer the K-Mart sales. Year-to-date, our comp store sales have been
negative 4.9%. Since the launch of the MARTHA show, they have been positive
4.9%. So we are seeing some real improvement in sales. I should add that we
worked very well with K-Mart through this period. They have -- they have used
the launch too, to drive buyers into K-Mart stores, and have done more
advertising during this period than -- than earlier in the year. But it is
clearly benefiting both of us.
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DOUGLAS ARTHUR - MORGAN STANLEY DEAN WITTER - ANALYST
Susan, regarding the opportunity in retail, if you look out two or three years,
would it be your plan/hope to have a substantially greater retail revenues,
non-K-Mart royalty base?
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SUSAN LYNE - MARTHA STEWART LIVING OMNIMEDIA INC. - PRESIDENT, CEO
Yes. Very definitely.
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DOUGLAS ARTHUR - MORGAN STANLEY DEAN WITTER - ANALYST
And do you think that is achievable or time will tell?
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SUSAN LYNE - MARTHA STEWART LIVING OMNIMEDIA INC. - PRESIDENT, CEO
Well, obviously, time will tell, but -- but I would not be saying it on this
call if I did not think that it was achievable. We believe there is a lot of
growth potential in our signature line. We currently just have paint and
furniture, but we see a lot of opportunity in expanding that to higher-end soft
goods and to -- and to lighting, flooring. Also obviously, the -- the K-Mart --
excuse me, the KB Homes deal -- we went into not just because we think the homes
themselves are an opportunity for us, but because they also give us a way to
understand better the opportunity in some of the harder home areas, like
cabinets and flooring and moldings and doors and windows and things that I think
the Martha Stewart brand and our -- our creative expertise could bring a lot to.
We have hired a fantastic Merchandising Chief, Robin Marino, who has only been
with us for under six months, I think, she has already had a huge impact in --
in helping us to understand where the opportunities lie. And has been doing an
enormous amount of outreach to, just get a better sense of the opportunities for
the brand.
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DOUGLAS ARTHUR - MORGAN STANLEY DEAN WITTER - ANALYST
Great. Thank you.
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OPERATOR
Thank you. [OPERATOR INSTRUCTIONS] Our next question is coming from Michael
Meltz of Bear Stearns. Please go ahead.
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MICHAEL MELTZ - BEAR STEARNS - ANALYST
Hi, thank you. At the Publishing group, can you give us the advertising and the
circulation revenue performance for the group and then for MSL? That is my first
question. Jim, can you also give us the NOL balance. And then Susan, I have
another question for you after that.
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JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA INC. - CFO
In the Publishing group, total circulation revenues were up 12% in the quarter.
Advertising revenues were up 44% in the quarter.
For Martha Stewart Living, circulation revenues were up 15% in the quarter, and
advertising revenues were up 72% in the quarter. So just so you understand, the
advertising revenue growth in Martha Stewart Living, obviously outstripped what
we said was the 48% growth. That really is two components put at it. Our net
revenue per page is higher. And a paid-page basis -- we only publicly quote MIN
because that is what the public sees -- but on a paid basis, our pages are up
higher than 48%.
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MICHAEL MELTZ - BEAR STEARNS - ANALYST
What were they up?
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JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA INC. - CFO
They were up somewhere in the -- let's see, somewhere in the 60% range,
somewhere in that range. That is actually about the 72% with the rate increase.
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MICHAEL MELTZ - BEAR STEARNS - ANALYST
Okay. The NOL at the end of the quarter?
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JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA INC. - CFO
It is somewhere in the $100 million range. That is the end of the year number.
We do not really do it quarterly, but we project it about $100 million the end
of the year.
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MICHAEL MELTZ - BEAR STEARNS - ANALYST
And Susan, you mentioned a few times the ad momentum you have in the fourth
quarter and into '06. Can you talk a little bit about, at this point, what type
of commitments you have for '06?
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SUSAN LYNE - MARTHA STEWART LIVING OMNIMEDIA INC. - PRESIDENT, CEO
I do not want to get that specific. We are still very much in the planning
season. But I will tell you that -- that interest in our publications obviously
would -- with Living leading the group, has been very, very strong. So as I
said, we are going into '06 with a lot more confidence about what we can deliver
and the -- the interest is coming from a very broad range of advertisers.
Clearly -- automotive, and packaged goods and beauty and the major ad categories
are all there, but it's also some of the touchier advertisers or the -- or some
of the advertisers that were the first out, like financial services, that --
that are also back in.
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MICHAEL MELTZ - BEAR STEARNS - ANALYST
Okay. Thank you. Actually, let me sneak in one more. Is there a related
charge to the new employment agreement with the Chairman?
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JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA INC. - CFO
There would be in the fourth quarter. That agreement was entered into the
fourth quarter and that is in our guidance.
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MICHAEL MELTZ - BEAR STEARNS - ANALYST
So that is in the $6.5 million of guidance, of the non-cash charge?
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JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA INC. - CFO
Well, there is both a cash and a non-cash charge. The cash charge will
approximate $700,000 in the quarter. And the non-cash charge is included in that
overall number.
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MICHAEL MELTZ - BEAR STEARNS - ANALYST
Okay. Thank you.
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OPERATOR
Thank you. Our next question is coming from Robert Routh of Jefferies. Please
go ahead.
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ROBERT ROUTH - JEFFERIES & COMPANY - ANALYST
Yes, good morning. A few quick questions. I don't know if you give this out but
I was wondering if you could give any sense as to what your total ad pages are
- -- or have been for the quarter, both in total and for Living? As well as
year-to-date for those -- Living and the other publications? And second, I was
wondering if you could give us a little bit more detail on the SIRIUS satellite
deal. You mentioned that is automatically going to be cash flow positive for
you. I wonder if you could give us a little bit of sense as to degree of
magnitude there.
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JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA INC. - CFO
On the page side, and I will quote in the third quarter, we -- we had --
reported 227 pages over 153 in the fourth quarter -- in the third quarter of
2004. We have had 135 ad pages in last year's fourth quarter and we are
projecting those pages to double. I think -- it looks like it will be slightly
more than double. On Everyday Food, the third quarter of last year, we published
64 pages and we reported 77 this year. And in the fourth quarter of last year
85, and we are expecting, 20%, 30% growth in pages there as well.
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SUSAN LYNE - MARTHA STEWART LIVING OMNIMEDIA INC. - PRESIDENT, CEO
And on the radio business, we have said before that this is a $7.5 million a
year guarantee. And that we expected EBITDA to be in the $4 to $5 million range.
It will be $5 million approximately.
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JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA INC. - CFO
And we will be recognizing that revenue in the fourth quarter. No revenue has
been recognized on that deal until the fourth quarter, which is when the program
launched.
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SUSAN LYNE - MARTHA STEWART LIVING OMNIMEDIA INC. - PRESIDENT, CEO
We will be recognizing two months worth of -- of that deal, not a full three
months.
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ROBERT ROUTH - JEFFERIES & COMPANY - ANALYST
Okay. Great. And just one follow-up. Given where your stock price is and the
balance sheet, and projections for the future that seem to be going in the
right direction, has management considered buying back any stock at present
levels?
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JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA INC. - CFO
Well, we look at use of cash every day here, and it is always one of the topics
we evaluate. Beyond looking at it every day, we cannot comment or commit whether
we will do that at this moment.
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ROBERT ROUTH - JEFFERIES & COMPANY - ANALYST
Great. Thank you very much.
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OPERATOR
Thank you. Our next question is coming from Gary McDaniel of Standard & Poor's.
Please state your question.
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GARY MCDANIEL - STANDARD & POOR'S - ANALYST
Hi, good morning. A couple of questions on KB Home. Can you give us any
financial details on how the relationship is going to work out?
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SUSAN LYNE - MARTHA STEWART LIVING OMNIMEDIA INC. - PRESIDENT, CEO
Well, I can tell you that the -- the initial program revenues, based on a
profit-sharing arrangement -- essentially, above a base rate, we share in the
gross margin.
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GARY MCDANIEL - STANDARD & POOR'S - ANALYST
Okay. But you -- you can't tell us what your share is above that base rate?
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JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA INC. - CFO
No. Essentially, there's a profit on a home and as the profit increases we
participate in that, but we have not disclosed for confidentiality reasons,
what that percentage --
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GARY MCDANIEL - STANDARD & POOR'S - ANALYST
You have no estimate at this time that you can give us for what you are
expected to be?
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SUSAN LYNE - MARTHA STEWART LIVING OMNIMEDIA INC. - PRESIDENT, CEO
Not until they start selling.
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GARY MCDANIEL - STANDARD & POOR'S - ANALYST
Fair enough. Also on KB Homes, I have seen some comments from KB Home that they
might be less interested in having their models populated with their furniture
and housewares than you are. That something that you are still negotiating?
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SUSAN LYNE - MARTHA STEWART LIVING OMNIMEDIA INC. - PRESIDENT, CEO
No. I --
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GARY MCDANIEL - STANDARD & POOR'S - ANALYST
Do you expect to be able -- I'm sorry, go ahead.
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SUSAN LYNE - MARTHA STEWART LIVING OMNIMEDIA INC. - PRESIDENT, CEO
I think that was a -- a misunderstanding. They will be furnished with our
signature furniture and our paints will be in every one of them. There are
certain things that we just do not make, so at this point -- flat screen TVs and
lighting and there are -- there are a lot of other products that will go into
these homes. But we all anticipate the signature furniture will be there.
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GARY MCDANIEL - STANDARD & POOR'S - ANALYST
Okay. And then if we could just move on to the TV shows real quick? Do you
think The Apprentice is having the expected impact on brand awareness? And is
there anything you can quantify as far as that goes?
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SUSAN LYNE - MARTHA STEWART LIVING OMNIMEDIA INC. - PRESIDENT, CEO
Well, I cannot quantify it in -- in any hard way. But, look, the -- we went
into this with a very clear sense of what we would get out of it, which was
exposure to a new audience. And it is encouraging that -- that every week for
the last three, those numbers have been going up quite steadily. Last night, it
actually broke a three rating in 18 to 49 for the first time. And there is
clearly a build now. There is no question.
Anecdotally, I can tell you we see it everywhere. But I can't believe that some
of that K-Mart growth we talked about and certainly our -- our increased
Internet traffic is due to The Apprentice. No question.
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GARY MCDANIEL - STANDARD & POOR'S - ANALYST
Okay. And one last thing. Given the underperformance of -- relative to
expectations for ratings for both The Apprentice and the daytime show, do you
still feel that granting 2.5 million warrants to Mark Burnett was a sound
business decision?
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SUSAN LYNE - MARTHA STEWART LIVING OMNIMEDIA INC. - PRESIDENT, CEO
I think Mark has brought enormous value to the company. I don't think that --
that we would have attracted the level of talent to the new television show that
we have -- we have the best team in the business, and they prove it every day. I
think that Mark was instrumental in helping us to rethink what our daytime
television could and should be. And I think we'll see the value of that over
years to come. He is a -- he's extremely talented. I don't think there's a
single program he's put on to the air that -- even when they don't deliver the
highest ratings, they are of the highest quality. And he's -- he's the kind of
partner we are very happy to have on board.
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GARY MCDANIEL - STANDARD & POOR'S - ANALYST
Thank you.
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OPERATOR
Thank you. Our next question is coming from William Drewry of Credit Suisse
First Boston.
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WILLIAM DREWRY - CREDIT SUISSE FIRST BOSTON - ANALYST
Hi, thanks. Just one question. I was just wondering if you could talk about
advertising yields for the magazine -- for both Martha Stewart Living and
Everyday Food in this period versus, maybe six months ago and year-over-year, as
well, if you are willing to talk about that?
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JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA INC. - CFO
I can tell you that the third quarter -- so our net revenue per page up in the
mid -- mid single digits on an average revenue per page.
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WILLIAM DREWRY - CREDIT SUISSE FIRST BOSTON - ANALYST
Okay.
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JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA INC. - CFO
And, look, I think we have seen some fairly steady improvements throughout the
year; although, I cannot say exactly what the growth is.
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WILLIAM DREWRY - CREDIT SUISSE FIRST BOSTON - ANALYST
So, Jim, suffice it to say, there has been a good sequential increase.
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JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA INC. - CFO
Yes.
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WILLIAM DREWRY - CREDIT SUISSE FIRST BOSTON - ANALYST
Okay. Perfect. Thank you.
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SUSAN LYNE - MARTHA STEWART LIVING OMNIMEDIA INC. - PRESIDENT, CEO
I think the other thing worth noting there is that -- that with new advertisers
coming into the magazine and -- and returning advertisers, those yields are
significantly higher. There are obviously advertisers who have been with us for
the long haul, who we have not been able to bump up as fast. But as more and
more new advertisers come in, we expect that yield to grow.
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WILLIAM DREWRY - CREDIT SUISSE FIRST BOSTON - ANALYST
Great. Thank you.
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OPERATOR
Thank you. Our next question is a follow-up question coming from Dennis
McAlpine of McAlpine Associates. Please go ahead.
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DENNIS MCALPINE - MCALPINE ASSOCIATES - ANALYST
Thank you. With regard to Martha Stewart Living and the increase in rate base
- -- that is going into effect in the January issue, so you would get a portion of
that in the fourth quarter? Or will that actually be the February issue? And can
you talk about the increase in CPM related to that?
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JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA INC. - CFO
Well, our -- the rate base goes up with the January 2006 issue, which is booked
as the final issue in our fourth quarter; although the January issue tends to be
a relatively small issue for us and for all other publishers. So I would not
really be expecting to see any significant impact. And we'll -- our rates will
be adjusted accordingly. So we expect to be -- we have increased our open page
rate based upon that.
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DENNIS MCALPINE - MCALPINE ASSOCIATES - ANALYST
And CPMs?
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JIM FOLLO - MARTHA STEWART LIVING OMNIMEDIA INC. - CFO
Well, CPM is a function of the rate. So we will be, obviously trying to improve
our rates and we expect to have a growth in our net revenue per page.
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DENNIS MCALPINE - MCALPINE ASSOCIATES - ANALYST
Thank you.
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OPERATOR
Thank you. At this time, there appear to be no further questions. This does
conclude today's teleconference. [OPERATOR INSTRUCTIONS] Have a wonderful day.