The New York Times Company (NYT) Q2 2017 Earnings Report, Transcript and Summary

Good morning and welcome to The New York Times Company’s Second Quarter 2017 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Harlan Toplitzky, Executive Director of Investor Relations and Financial Planning and Analysis. Please go ahead.

Thank you. And welcome to The New York Times Company’s second quarter 2017 earnings conference call. On the call today, we have Mark Thompson, President and Chief Executive Officer; Jim Follo, Executive Vice President and Chief Financial Officer; and Meredith Kopit Levien, Executive Vice President and Chief Operating Officer. Before we begin, I would like to remind you that management will make forward-looking statements during the course of this call and our actual results could differ materially. Some of the risks and uncertainties that could impact our business are included in our 2016 10-K. In addition, our presentation will include non-GAAP financial measures and we have provided reconciliations to the most comparable GAAP measures in our earnings press release, which is available on our website at investors.nytco.com. With that, I will turn the call over to Mark Thompson.

Thanks, Harlan and good morning everyone. Well we’ve had another strong quarter. We grew revenue and operating profit year-over-year. And we passed two million pages digital-only news subscribers, a first by any news organization. But we’re still determined to move faster in our digital transformation. And as you’ll hear, we’re making significant changes throughout the company to make that happen. This also a quarter of spectacular journalism from our newsroom and editorial department. You could see that both in areas of classic New York Times strength breaking story after story, especially in our coverage of the Trump’s White House and domestic politics, and in exciting new ventures like our podcast, The Daily, which has grown from astounding start in Q1 to become one of the most highly regarded and most popular podcasts in the world. Indeed just this week the New York Times was nominated no less than eight News and Documentary Emmy Awards. We believe that the demand for quality in-depth journalism is growing, not only in the U.S., but across the globe. We can see that in the response of users to Times journalism and in the growth of our digital audience. And we believe that more and more people are prepared to pay to access to this kind of journalism. That’s the foundation of our strategy. So let’s look now some of the detail, beginning with our digital subscription business. As we indicated in our last earnings call, we’ve seen a moderation in the rates of new subscription additions since the two previous exceptional quarters. But we still added 93,000 net new subscribers to our digital news product, a 69% increase in the number of subscription additions, compared with the same quarter last year. And enough to take it over the two million mark. We reached that second million in less than half the time it took to get to the first million. Now we also added 21,000 net new digital Crossword subscriptions, an increase of 31% over this quarter last year. This means that together with our home delivery print subscriptions, we have 3.3 million total subscriptions, an increase of 37% since the same quarter last year. In July we also transitioned our popular cooking offering to a pay product with the goal of converting a percentage of its 10 million monthly unique users into paying subscribers. We expect to use both our cooking and Crossword products not just as standalone paid offerings, but also as added features to encourage some subscribers to opt for higher price subscription offers. Revenue from the Company’s digital-only subscriptions, which includes news product and Crossword product subscriptions increased 46%, compared with the second quarter of 2016 to nearly $83 million. Overall subscription revenue, that includes digital subscriptions, print home delivery and printing single-copy sales rose 14% to $215 million. Turning to advertising, our total advertising revenue grew for the first time since the third quarter of 2014. Q2 2017 marked our fourth consecutive quarter of double-digit revenue growth for digital advertising. In this case it was up 23% year-over-year. At 11% the rate of print advertising decline was lower than we’ve seen in the previous two quarters that we regard as more as a reflection of the monthly volatility in this revenue stream, rather than a significant turn in the market. Total advertising revenues were $132 million, slightly up from the previous year. Revenue for the company as a whole were $407 million, up 9%. While our adjusted operating profit of $67 million represents a 23% increase, compared with the same quarter last year. This increase was driven by the growth in digital and print subscription revenue, I’ve just discussed. It is also worth noting that in the quarter digital subscription revenue overtook print advertising revenue for the very first time. Print advertising revenue indeed represented just 19% of the quarter’s total revenues. We continue to implement the strategy outlined in our path forward and our newsroom’s 2020 report and are confident that we will achieve our stated target of a $100 million of annual digital revenue by 2020. Our newsroom is undergoing a process to streamline its editing function to match the speed and form of digital journalism, while freeing up resources to put more journalistic boots on the ground, to deliver more investigations and help us further develop our capabilities in visual journalism. The process is not an easy one. And we’ll see the departure of many valued colleagues. But I can assure you that we are maintaining and where possible increasing our investment in our journalism, hiring significant numbers of journalists with the expertise we need for our digital future. We expect the total size of our newsroom and editorial departments to remain comparable with today. And we’re also reorganizing our company to hold to accelerate our transition to digital. In June Meredith Kopit Levien was named Chief Operating Officer, and she leads the new operations group, which includes the teams responsible for product, design, audience, brand, consumer revenue and advertising. We intend to continue to invest in the growth of our digital business. I expect further investment in both brand and performance marketing in the rest of 2017. But we are also continuing to bear down on costs and improve efficiencies. To give one example we are currently in the process of transforming our use of space in our headquarters building here on Eighth Avenue, freeing up multiple floors to generate additional rental income, but also to develop a more collaborative and creative work environment. In closing, I’d like to comment on our remarkable international growth. In the past year our digital subscriptions have soared and The New York Times now has subscribers in 195 countries. International subscribers make up 14% of our over two million paid digital-only new subscriptions and continue to grow at a faster rate than our domestic editions. In fact, international subscriptions grew 80%, compared with the same period last year. But we also believe that we’ve only just begun to tap the potential for subscribers and advertisers beyond our domestic market. But let me turn over to Jim now for a more detailed financial review.

Thank you Mark. And good morning everyone. As Mark said the second quarter reflects continued solid progress in advancing our long-term strategy. Adjusted diluted earnings per share was $0.18 in the second quarter, compared to $0.11 in the prior year. We reported GAAP operating profit of approximately $28 million, compared to an operating profit of $9 million in the same period of 2016. As Mark mentioned, total subscription revenues increased by 14% in the quarter with digital-only subscription revenue continuing to grow strongly, up 46% to $83 million. Revenues from our core news product grew 47% in the quarter, while our Crossword product revenues grew 43%. On the print subscription side, revenues were nearly 3% higher as home delivery revenues more than offset a decline in revenue from single-copy sales. The increase in home delivery revenues in the quarter, compared with the prior year, primary resulted from a price increase in early 2017, which more than offset volume declines. Total daily circulation declined 3.8% in the quarter, compared with the prior year, while Sunday circulation declined less than 1%. As was the case last quarter, ARPU continues to decline in the second quarter largely due to the sharp increase in net subscription additions, most of which started on a promotional discount, relative to the size of our total subscriber base. As we experienced significant increase in net subscription additions over the past three quarters, we expect – ARPU to continue to decline before stabilizing when these new subscriptions step-up to full price. Moving along to advertising, we reported total advertising revenue growth of 1% as digital advertising growth more than offset print advertising decline. The growth in digital advertising was driven by smartphone, programmatic and our marketing service businesses. Lower print advertising was mainly due to declines in the luxury, real estate, technology and telecommunications and travel categories. On a monthly basis overall advertising revenue increased 1% in April, 5% in May and declined 4% in June. Other revenues grew 13% versus the same quarter of 2016 to $25 million, principally driven by affiliate referral revenue from the product review and recommendation websites, the Wirecutter and Sweet Home, which we acquired in the fourth quarter of 2016. The increase was partially offset by lower revenues from our live events business, which helped fewer conferences in the quarter, compared to the prior year. GAAP operating profits increased 11% in the quarter, while adjusted operating cost increased 7%. Our print production and distribution costs were lower in the quarter, while costs grew due to higher compensation, consumer marketing costs and costs related to companies we acquired in 2016. In the quarter, we recorded two charges that have been excluded from our pro forma results. First, we recorded $19 million severance charge largely related to a workforce reduction, principally within our newsroom, which was announced earlier in the quarter. We also recorded a $2 million charge in non-capitalizable expense with the reconfiguration of our headquarters building to make more space available for rental income. We are encouraged by the interest we have seen as we continue to market the space we are making available. And we expect to begin recording rental income in 2018. Moving to the balance sheet, our cash and marketable security balance grew during the quarter and ended the quarter at $807 million, with total debt and capital lease obligations principally related to our sale-lease back of our headquarters building of approximately $249 million. Now let me conclude with our outlook for the third quarter of 2017. Total subscription revenues are expected to increase at a rate similar to the second quarter 2017, driven by the continued benefit for our digital subscription revenue growth. We expect digital-only subscription revenue to grow approximately 40%, compared to the third quarter of 2016. Overall advertising revenues are expected to decrease in the mid-to-high single digits, with growth in digital advertising in the low-double digits. Other revenues are expected to increase in the high teens, largely from the impact of the Wirecutter business that we acquired in late 2016. And we expect our operating costs and adjusted operating cost to increase in the mid-single digits, reflect an elevated level of marketing and advertising spend to support digital revenue growth, higher newsroom costs reflecting the active news cycle and additional costs associated with the three acquired companies. And with that we’d be happy to open up for questions. Thank you.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Alexia Quadrani with JP Morgan. Please go ahead.

Hi thank you. My question is on the impressive digital sub growth we continue to see. Is there – any color you can give us in terms of the type of subscribers, is it demographics or the makeup very similar previous periods are you sort of entering a new demo maybe you haven’t penetrated well before? And then any color about the churn, is sort of trending same as average.

So maybe I’ll talk about the character of the new subscribers. I mean clearly many of these subscribers already people who were previously, significantly engaged in the Times. But there is, I think, some evidence of younger subscribers and a slightly higher proportion of women subscribers. And you’ve heard us say as well that the international subscriptions have been growing at a somewhat faster pace than demand. I think its being, I mean, both are growing strongly, but international has been very strong. And I think one interesting thing is that the news cycle, which obviously has been very sensitive around the President and his administration, has turned out to be a great interest to international subscribers, as well as domestically. But we are broadly encouraged by what we’re seeing about churn, with this group and more broadly we are seeing churn.

Yes.

Deal with that Meredith.

Sure. Hi Alexia. Just adding to Mark’s demographic point, we have seen certainly just after the election new subscribers coming in who are bit more likely to be from the center of the country, which I think is also pretty interesting in a bit less affluent that we’ve seen previously. On retention, I think, actually a really interesting story what we’ve seen so far is that the cohorted people, who came in, in the fourth quarter and in the first quarter are retaining at least as well and in some cases better than what we’ve seen from previous cohorts. And we’re looking very closely at their engagement, we look at frequency, or days visited and we look at how deep they go with content, the different kinds of content they engage with. And everything we’ve seen so far is that in many cases they are engaging at least as well if not better than we’ve seen in previous cohorts. And I think you asked about churn we’re seeing this cohort of people, churn at a lower rate. So based on where they are in 10-year versus in the previous years. So we’re quite optimistic.

Well, of course, obviously you will know more once they start lapping 12 months and stable...

Yes.

But the sign so far, I think, we say are definitely encouraging.

Yes and I would say generally we’re spending quite a bit more time and focus on retention. So a year, year and half ago, so long before the election we got better through the making longer introductory offers that routine better because give people more of a chance to subscribe. I think we’re getting better at on-boarding; we’ve gotten much better at understanding what we would call at-risk moment and actioning around them. We have more people who are actually coming to us on pay up front offers, so that helps with retention. And then, I can’t help but say, I think, our plan work plays a role here too, so that the truth is hard campaign has been good generally for the Times. But I think for folks who’ve chosen to pay us it’s a good reminder of what it takes to deliver high-quality journalism and what their investment is going to.

Thank you. Just one quick follow-up. On the internation subscribers, which obviously had very impressive growth and seems like a great opportunity for you guys going forward. Is the advertising opportunity though going to be as favorable? I just know from the here historical sort of IHT the advertising always lags which is more difficult to track down or toward those local advertisers or those national advertisers.

I think there is absolutely an advertising opportunity. I mean we said for the whole business that both the subscription business and the ad business that trade on the same driver of deeply engaged audiences around quality journalism. And I think there’s no reason to believe that doesn’t bear out internationally. I think the numbers internationally look similar if not the same as the domestic numbers from an advertising standpoints are the same growth trends. And what I’ll say is, I think, our deployment of our ad strategy over the last four [ph] years had focus on programmatic, and mobile, and marketing and creative services, rounded branded content and now even more than that is working internationally. So we’re quite pleased with what we’re seeing there so far.

I mean it’s fair to say isn’t it Meredith that some of the very big partnerships we’ve done, I think, for example, a partnership with Samsung…

Yes.

To create a Daily 360 is it’s a valuable global partnership and they are all brands who are trying to reach the whole world. And because of the scale of our audience and the kind of people we’re reaching around the world, we’re quite a valuable partner. I think we’re seeing more and more interest from very big brands, who want to do very large ambitious things with us.

I think that’s right and I think our international business, particularly you mentioned the INYT has tended to be luxury-focused. I think we’ve got a real opportunity and we’re seeing fruits of it. And transitioning a lot of that business into really interesting digital programs, but we’ve also had a strategy broadening beyond luxury outside of the United States and that’s beginning to bear fruit.

Okay, thank you very much.

The next question is from Craig Huber of Huber Research, please go ahead.

Yes good morning. Thanks for taking the questions. I guess someone just asked your large severance charge of $19 million, I believe is the largest you’ve had in almost three years here. What in your mind has changed and what you’re seeing in your business to do such a large severance charge here too?

This is principally associated with the changes I mentioned in my script in our newsroom, which is essentially a changing, screen lining, but also in some of the transformation of the way in which our journalism is edited in our newsroom. And this is really, I think, to implicate our executive [indiscernible] he would say, but this is really about developing a capability around editing, which is completely in tune with the kind of journals we’re trying to do now and which is focused on our digital-first, smartphone-first strategy. And whereas perhaps sometimes in the past these changes have been associated with a straightforward kind of downsizing for budget this is much more about getting the capabilities we need in our newsroom. So that’s the biggest single thing that’s happening. I see it as part of our investment in accelerating the growth of our digital audience and digital business. Jim do you want to any color to that?

It’s well said, well said.

Just curious and so none of it has to do with maybe souring outlook for the economy as you look at it, or further precious print or anything like that…

No.

Nothing like that, huh?

No Craig. This has been, we’ve actually – we started talking about this last year.

Yes.

We put out many quarters, good quarters since then. So this is not – this is just something that we’re executing on.

Yes.

Mark describe it correctly.

No, I think, I want to say we’re in the middle of a fairly big. I just talked about the news read, you’ve still got the rest of the company, we are in the middle of a significant reorganization. I mentioned and Meredith just now, I’m very pleased to say our Chief Operating Officer. And she’s bringing a new organization together. I’m sure we will be looking at whether in a sense the shape of the organization, the laze and the expand controlling the organization are right. And I certainly don’t rule out what we were constantly looking for ways of trying to deliver us superior results but with less cost involved. I certainly don’t rule out some classic steps to reduce costs in the company. We have no immediate plans, because that’s not impossible. The other thing which I mentioned is the work we’re doing in using the space we have in this building on the Eighth Avenue, 28 Avenue using the space more effectively. And that will produce financial benefits. In those cases the benefits will be expressed in the ability to rent out additional floors in the building, but it will have a positive effect on our economics, as well.

And I would say that too was a long time in the making, I don’t think you should read into any of this stuff as anything other than our constant focused on efficiency and reinventing the business.

Yes.

There’s different story behind each one of this. But as I said earlier in both cases this is long-time planning and initial part of the evolution business.

The other thing is we both given our, we both mentioned is we are the other big thing buried in our cost is the fact that we’ve been this year more aggressively investing both in performance marketing, and in direct marketing and the first time in many years in brand marketing. And that’s because we see there’s an opportunity to build our digital business more rapidly. And although that is no doubt having a effect to the moment in our cost base, so that you can also see from our revenue numbers, that it is delivering results.

And my other question if I could, what are you budgeting for CapEx this year? And how much of that is for the headquarters we design please – which we expect for next year…

The press release which we gave guidance around capital we said was $85 million to $90 million, about $50 million of that will be related to headquarters.

And will that be all done this year…

– :

Thank you.

The next question comes from Doug Arthur of Huber Research. Please go ahead.

Yes thanks, three questions. Jim just a clarification in terms of looking at the severance charge relative to adjusted production costs versus SG&A, is it fair to assume because it was newsroom focused that most – if you’re going to come out with an adjusted SG&A number excluding the charge that most of that would fall into SG&A not production costs. Is that the right way to look at it?

All of these severance charge, like we just historically put all our severance charges to the SG&A line is that we consider it non-operational.

Okay. And then Meredith the digital ad revenue guidance for the second half is pretty impressive considering you had big numbers, big growth numbers last year in the second half. So is this kind of visibility on projects in the pipeline, or is just sort of ongoing organic growth or a bit above?

I think the right answer is probably a bit of both. We’ve been at the strategy of pivoting the digital ad business to be a creative launch pad business, a marketing services business grounded in mobile products that can be sold programatically. And I think we’ve been sort of steadily at that for almost four years now. And I think as time goes on we’re getting a bit more visibility into it. We are building bigger partnerships though we’re working with marketers on sort of more lasting partnerships and not just generally comes with a bit more visibility and I think a bit more stability in the business. I also think there are two other things that are going on and they go to your, I think, the second point your made about this. One is there continuous to be real interest in the market in brand safe environments and environments that are above doing high-quality contents and things that have real value to people and that bodes well for the Times and for ad business generally. And two, as we see really nice gains in audience and engagement because the news cycle in case of our journalism we realize that in advertizing as well. So to some degree the ad business is a supply-driven business and as there is more supply of deeply engaged audience, there is more advertisings.

Got it. And I could do the math myself, but I would assume based on your overall ad guidance for the third quarter, you’re expecting – and I know its third quarter print is seasonally not, it’s not a great quarter seasonally.

Yes.

So I would assume that your print expectations are somewhere between Q1 and Q2 for Q3.

Yes, I think that’s fair. There’s still a lot of volatility in the market. You just have to look at the Q2 month by month print results to see that. September is a huge month and a very important part for print of Q3 actually the whole of Q3, we don’t have great visibility into that yet, so…

I think it’s a very important point that the outturn on the quarter is very hard to predict. Frankly, even into August it’s quite obviously that’s going to have in September.

Yes.

It’s also better say that so far Q3 looks more like Q1 and Q2 it’s also kind of in the way.

And I’ll – look I’ll keep saying what we’ve said before on print. It still has a place in a market where there is mix then there are certain things like an announcement and event of a launch of new product where there is nothing is more effective at conveying importance to an audience or getting attention from an audience. And we expect that continue. So we’ve seen periods of sharp decline in print before and then we’ve seen periods of stabilization.

And a really good example of that is the decision by Fox News. Fox & Friends has got a full page ad in the physical New York Times today. So they started to move up market and support our journalism with that money. So we’re very pleased...

[Indiscernible]

And just final question, I know you’re not giving quarterly guide on digital subs, news only. The third quarter last year was obviously the start of a very significant sort of ramp almost three quarters.

Yes.

So I think it was 120,000 news only net in the third quarter last year. Jim, I thought you made some reference to your expectation broadly, but is there any comment on third quarter trends?

Can’t just say, absolutely you are Doug. What you said first is we’re not giving guidance on numbers, that’s completely correct. And I think what Jim talked about was revenue rather than numbers. But most of it…

Yes.

Yes revenue is clearly easier to predict it’s more of a newly type business, we’re very confident in guiding on revenues, we’ve been wildly off in our ability to predict great numbers, so we moved away from that. It’s not going to be a huge volatility in that number, it will likely not be a huge driver in the quarter we’re very confident in the revenue number.

But if I can say, I just wanted to briefly say what I said last time, in the last earnings quarter about the digital subscription business, which is we were seeing real growth. If you go back and look at the second quarter results since the model launched, back in 2011, you’ll see long before the presidential cycle and the arrival of Mr. Trump in the White House. You can see acceleration in the models. And although as we had said in our last earnings call we’ve come off the peak of what you can call the Trump bump. We still believe we can see and indeed kind of exploit underlying acceleration in the model. We’re not going to give you a detailed guidance on numbers of digital ads for Q3 because we don’t have the visibility ourselves. We think it’s a pull there and to pretend that we do. What I can say is we’re very confident that we can continue to build this audience. And we’re not yet satisfied with the underlying rate which we’re growing the digital business. We think the potential is so great we should be speeding up. And we are essentially re-organizing into our company and spending a lot of money on marketing to achieve and to increase that acceleration.

Great thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Harlan Toplitzky for closing remarks.

Thank you for joining us this morning. We look forward to talking to you again next quarter.