Tuesday, August 30, 2011

BN Says Nook Is A $900 Million Business, Set to Double

Barnes & Noble reported first quarter results that were mostly below analysts' expectations, but showed strong growth in the Nook business and for the first time broke out the entire digital reading segment. The Nook segment--including content, devices and accessories--totalled $277 million for the quarter, with BN saying digital content sales quadrupled over the year. They say the Nook business comprised $880 million last year (and $123 million in 2010), and "is expected to double this year to $1.8 billion." That news, and projections of smaller losses and much better EBITDA thanks to the Liberty Media investment sent Barnes & Noble shares soaring in early trading, up over $2 a share just after the opening bell and still up by well over 10 percent later in the morning.
Total sales for the quarter were $1.418 billion, up 1.5 percent on an overall basis, though all the gains came through BN.com as both retail and college sales slid. While print book sales continued to fall, the company told investors "we saw that rate of decline slow" and "project a further pick-up in our physical book sales" as Borders finishes its liquidation. Regular store comps declined 1.6 percent (better than the 2.1 percent falloff analysts expected), while college store comps fell 1.8 percent (worse than the 0.6 percent analysts estimated). The consolidated net loss was $56.6 million, or 99 cents a share, a $6 million improvement versus a year ago, but still more than analysts had expected. The company says EBITDA improved 23 percent in the quarter, at $30.7 million.
In this morning's conference call with analysts, ceo William Lynch noted that BN.com margins are improving considerably, helped in part by agency pricing. "We see agency expanding. We think agency is going to take hold as the dominant form of pricing for ebooks going forward. It makes a lot of sense for a lot of reasons. Clearly agency expands our gross margins."
PubIt remains "the fastest growing part of the sales and catalog," with those units "typically priced under $2.99." Some of that growth is from IP holders who can monetize electronic content as "ebooks" that has been harder to charge for via the web itself. Lynch said traditionally-priced frontlist books are performing steadily, too, though, adding "we see that pricing holding there." He still estimates their ebook market share at 26 to 27 percent, and says they are doing slightly better with electronic periodicals. As for the recent change in iOS apps, Lynch says "we didn't see a marked change in purchasing through the app itself." In answering another question, Lynch declared "this belief that people are going to read books on smartphones just hasn't materialized."
In addition to breaking out the Nook business, BN has resumed providing forward earnings guidance, which can be seen as a sign of stabilization as well. They are projecting full-year sales of $7.4 billion, and losses of 10 to 50 cents a share. (With the Liberty Media investment, however, they see full-year EBITDA of between $210 and $250 million.) The sales gain from the disappearance of Borders is put at a modest $150 to $200 million (only roughly 10 percent of Borders' sales).
Lynch foresees a big holiday as part of that forecast: "With Borders going out, we're convinced this holiday will be the biggest traffic we've had in the stores for five years." He says their educational toys and games initiative also continues to perform well, with 66 percent comparable-sales growth in the past quarter. Store president Mitchell Klipper added that they are "talking to the landlords now about acquiring some leases" for locations that have been occupied by Borders, without indicating a number of new stores under discussion.
One more interesting sign: the conference call with analysts was far busier (and too much longer) than usual, with many more participants asking questions than in the past. Clearly the Nook results and Liberty investment have attracted new attention for the company from the financial sector, and participants enjoyed being able to query management about the particulars of the ereading business. (You can expect that analysts will now conjure new guesses about the size of the Kindle business based on Barnes & Noble's disclosures today.)
Finally, in the official release Lynch comments, "Our strategy of growing market share in the exploding digital content business while maximizing cash flow and EBITDA from our retail operations is paying off. We plan to continue investing in the significant growth areas of our business, and in fiscal 2012, we expect to see leverage as our digital sales growth is projected to exceed the growth of investment spend. Additionally, the return on investment is expected to increase in future years, as readers purchase increasing amounts of digital content on the platform we have built."

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