Harlequin Reports on First Quarter

Yesterday Torstar Corporation, the parent of Harlequin, reported on their financial results for the first quarter ending March 31, 2010.

The press release said:

Book Publishing operating profit was $22.7 million [Canadian] in the first quarter of 2010, up C$2.1 million from C$20.6 million in the first quarter of 2009, including a positive C$0.4 million from the impact of foreign exchange. Operating results were up in the North America Direct-To-Consumer division and down in the North America Retail and Overseas divisions.

That operating profit of C$22.7 million represented a 10.2% gain over the same period last year. That gain is all the more impressive when you realize that actual revenue from sales was down 9.4% for the same period.

Pay attention to that line about operating results being up in the North American Direct-to-Consumer division while down in the North American Retail division. That means Harlequin's e-book sales are strong while the bookstore sales are not.

I reviewed the Seeking Alpha transcript of the earnings call yesterday. Here is the first reference to Harlequin's performance in that call by David Holland, the president and CEO of Torstar, confirming the strong e-book sales:

Lower costs were the main contributor to the growth experienced. On Harlequin, Harlequin continued to perform very well aided in the quarter by a strong North American digital performance.

In reviewing the Harlequin results, Publishers Weekly reported:

Sales in the North American direct-to-home market rose in the period due to “significant” growth in digital revenues while traditional sales were flat ... Despite the sales decline, operating profits rose ... Lower promotional spending was cited as one reason for the profit improvement. Lower retail sales in North America were attributed to lower unit sales and higher returns [of books to publishers].

Scott Cuthbertson, analyst from TD Newcrest, asked three questions: (1) about the outlook for this year versus last year; (2) about the impact of e-reading devices and (3) about the relative contribution of an e-book sale versus a traditional sale.

Donna Hayes, CEO of Harlequin, responded:

... the outlook is to be pretty much matching the results we had from last year which were pretty strong as you know and probably what we’re looking at is digital on the positive side of that and some softness in the US retail market that we’re seeing which will offset that to some degree. And of course foreign exchange [rates' negative impact].

... On digital itself we had a terrific first quarter in digital largely driven by North American digital and really based on the release of all of these new E-Readers ... So we certainly see that as a real positive ... around how to promote and sell eBooks to consumers in North America.

I don’t think we’re going to comment on the relative contribution ... but it's certainly great for the revenue picture and we feel good about where it will be by the end of the year. I would caution that in Q1 we do think that a lot of E-Readers got sold as Christmas gifts in December so there was a lot of buying around those devices.

I was very interested in Ms. Hayes response to a later question from Randal Rudniski, analyst from Credit Suisse, who asked what was different in the Direct-to-Consumer segment because Retail was obviously down. Ms. Hayes responded:

The reason that it's up is primarily the digital business ... so I’d say .... that the traditional book club is doing very well and kind of matching last year and then we’re adding, which is great, and we’re adding on top of that this digital growth which really explains why it was the star division of the quarter.

Her comment about the traditional book club business doing very well is somewhat at odds with my reading of the situation.

During the same period last year (First Quarter), Harlequin reported North American Direct-to-Consumer sales were down C$1.4 million. Harlequin's press release said they'd made the decision to close their direct-to-consumer distribution center in the U.K. and to outsource that function. That move cut C$600,000 in expense as well as 16 jobs.

Since Torstar does not break out the digital and book club performances, there's no way to know for sure if my reading of the situation is on target or not.

When Ms. Hayes was asked about possible price increases, she responded:

I wouldn’t expect one this year ... when we think about pricing, we really think about splitting the business into two: our series business and then our single title business. When you think about single titles, we’re pretty much at the maximum market price for single titles in the US which is $7.99, so you won’t really see much movement there.

On series, we did take a price increase in our book club business last year which contributed quite nicely to results. The last retail increase was the prior year and we would not anticipate a series increase at retail until at least next year ...

Seeking Alpha allows me to quote 400 words from their transcript, so I've done a lot of editing to keep the above quotes below 400 words. You can read the transcript yourself by going to the Seeking Alpha website here.