New York Times Co (NYT) 2014 Q1 法說會逐字稿

Good morning.

My name is Jay, and I will be your conference operator today.

At this time, I would like to welcome everyone to The New York Times Company's first-quarter 2014 earnings conference call.

(Operator Instructions)

Please note, this conference is being recorded today, Thursday, April 24, 2014.

Thank you.

Miss Andrea Passalacqua, Director of Investor Relations, you may begin.

Thank you, and welcome to The New York Times Company's first-quarter 2014 earnings conference call.

Joining me today to discuss our results are Mark Thompson, President and Chief Executive Officer; Jim Follo, Executive President and Chief Financial Officer; Denise Warren, Executive Vice President, Digital Products & Services; and Meredith Kopit Levien, Executive Vice President of Advertising.

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 2013 10-K.

I should also mention that 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, Andrea, and good morning, everyone.

So 2014, has got off to a good start, with solid revenue performance across the board in the first quarter.

Both print and digital advertising grew year on year in the quarter, the first time we've seen that for a number of years.

Print grew nearly 4%, while digital advertising was up 2%.

We believe we're making meaningful progress on some fundamentals in advertising, including performance in innovation, as witnessed by the very successful launch of our native advertising solution paid products -- paid posts, I'm sorry.

However, the strong numbers for Q1 do not mean that we're declaring victory just yet on the advertising front.

As Jim will discuss in a moment, we still expect significant variability from month to month.

This April, for instance, is proving materially tougher than January, February, or March.

And although the positive momentum of recent quarters is still in evidence, we'll also face tougher comps as we get further into the year.

On the consumer side, we added 39,000 net digital subscribers in the first quarter.

That brings the total number to approximately 799,000 digital-only subscribers, an increase of 18% year over year.

Overall, revenues ended up nearly 3% versus last year's quarter, building on the revenue progression we saw in the second half of 2013.

The Company's operating profit for Q1 2014 was $22 million.

That compares to $28 million for the same period of 2013, with the reduction being driven principally by investments in our growth initiatives, as well as by some recent spending in the advertising department, as we undergo a restructuring there.

We believe that these focused investments are critical to long-term growth and value creation, even as we continue to look for ways to reduce core costs, wherever we can.

During the quarter, we continued to execute our strategy to leverage our content to strengthen our revenue profile, including the rollout of an expanded digital product offering, aimed at better serving our broad mix of readers.

So earlier this month, we initiated the launch of our new paid product strategy with the introduction of NYT Now and Times Premiere.

As we've discussed in previous calls, NYT Now is a new mobile app curated by New York Times editors, and available exclusively on the iPhone for now, which targets on-the-go consumers at a lower price point than our original digital subscription packages, and Now subscription also gives users unlimited access to top news stories on the web.

Times Premiere is a suite of exclusive content and features aimed at existing print and digital subscribers who just can't get enough of the Times.

As for pricing, NYT Now currently costs $8 every four weeks, while Times Premiere is priced at $45 every four weeks, or $10 extra for home delivery subscribers.

It's too early to quantify how these new products are performing, but they have been positively received by the industry, and we're seeing indications that NYT Now in particular is reaching people who have never subscribed to the Times before, many of whom are significantly younger than our loyal core subscriber base.

We're also encouraged by initial consumer interest in the new Premiere package.

We do, however, expect these initiatives to take time to ramp up, since particularly in the case of Now, they must reach beyond the established user base that we were able to tap into, when we initially launched the core digital subscriptions three years ago.

We're now hard at work marketing the new products via a variety of channels.

And we'll also be launching further digital products this year, beginning with NYT Opinion in June, followed by Cooking in the Fall.

And we have a variety of other new products and projects in the works, as well.

Two days ago, for instance, we launched The Upshot, which is edited by former Washington Bureau Chief and pulitzer prize winner, David Leonhardt.

The Upshot is our new politics and policy venture, which uses data analytics to help readers navigate the news.

It's a standalone section at NYTimes.com, and will also appear both on mobile and in print.

I've already mentioned one of our new digital advertising products, paid posts, the native advertising product which we launched on the web in January.

This has now been followed by the introduction of mobile paid posts, as part of the launch of NYT Now.

The plan is that NYT Now will roll out exclusively on these in-screen native units.

We expect native advertising to prove a meaningful revenue in 2014, and to grow thereafter.

It and other product innovations are part of our effort to return digital advertising revenue to sustainable growth.

On the international front, the International New York Times will soon begin accepting payments in local currencies for its digital subscriptions.

The gradual rollout of this capability will boost our international marketing effort in our pursuit of new non-US digital subscribers.

All of this, though, should be seen in the context of a continued commitment to supporting and investing in the highest-quality journalism.

Last year The New York Times -- last week, The New York Times won two Pulitzer prizes, sweeping the photography awards.

Tyler Hicks won in the breaking news photography category for his pictures of the aftermath of a terrorist attack on a Nairobi shopping mall, and Josh Haner won in feature photography, for his photos of the rehabilitation of a Boston Marathon bombing victim.

In conclusion, we still have much to prove in 2014, but we've come into the year with a strong foundation.

We believe we are making the right investments in those areas of our business where we can leverage our content and brand to expand our revenue streams.

I told you that we see variability and tough year over year comparisons in the coming months for advertising, but we're also encouraged by the tangible progress we've made on that front.

We're encouraged, too, by the growth in Q1 in our digital subscriber numbers, and by the buzz that our new products have generated.

But for now, over to Jim Follo.

Thanks, Mark, and good morning, everyone.

As Mark noted, we began 2014 on a positive note, with a quarter of solid revenue gains, and a good start on our effort to scale our audience of paying digital readers.

Our first-quarter revenue performance reflects steady growth on the circulation side of the business, combined with strong results in the advertising side, leading to our third consecutive quarter of overall revenue growth, excluding the impact of the additional week on Q4 2013.

As expected, our costs rose in the quarter, as our continued diligence in reducing our core costs was more than offset by investments we are making in our growth initiatives, as well as by higher retirement costs.

The growth initiative costs will rise further throughout the remainder of the year, as we must now factor in marketing expenses around these new products.

Now that NYT Now and Times Premiere have launched, we've begun generating revenues for these initiates.

But as Mark noted, it will take some time to scale those revenues.

Operating profit before depreciation, amortization, severance, and non-operating retirement costs, and a special item, a newly-introduced metric that we are calling operating profit, which I will address more later, decreased 1% to $57 million in the quarter.

The decline was driven mainly by a $13 million increases in operating expenses compared with the first quarter 2013, most of which was attributable to our growth initiative spending.

We reported GAAP operating profit of $22 million in the quarter.

Circulation revenues rose 2% in the first quarter, with our digital subscription revenue stream responsible for the bulk of that increase.

We saw 18% growth in the Company's digital subscription base, and also benefited from the 2014 home delivery price increases.

In the first quarter, digital-only subscription revenues were approximately $40 million, an increase of about 14% from the same quarter in 2013.

Advertising maintained its momentum in print and digital, swinging to positive growth on both platforms, and leading to an aggregate advertising growth of more than 3%.

Print advertising revenues increased nearly 4%, and digital advertising was up 2%.

Advertising revenues do continue to exhibit month-to-month volatility in short-term buying decisions, demonstrated by growth of 4% in January, a decline of 1% in February, and then back to growth of 6% in March.

Digital advertising saw particular strength in January, and print was notably strong in March.

National advertising saw positive overall growth in the first quarter, and drove the strong revenue trends in both print and digital advertising.

Retail advertising also grew across print and digital in the first quarter, while total classified advertising declined on both platforms.

Rounding out our results, operating expenses before depreciation, amortization, severance and non-operating retirement costs, or adjusted operating costs, increased 3%.

Costs rose 4% on a GAAP basis, and we reported diluted earnings per share of $0.02.

Diluting earnings per share, excluding severance, non-operating retirement costs and special items, or adjusted diluted earnings per share, was $0.07 in the first quarter, compared to $0.08 in the 2013 quarter.

The Company sustained its expense management efforts in the first quarter, as we found ways to lower core costs, even as investments associated with our strategic initiatives accelerated.

[Costs rose] were mainly due to higher compensation of benefit expenses, associated with our growth initiatives and advertising spending, as well as due to retirement costs, partially offset by printing and distribution efficiencies.

Moving to the balance sheet, our liquidity position remains solid in the first quarter.

We ended with $973 million in cash and marketable securities.

Uses of cash in the quarter included the payment for performance-based year-end compensation.

In addition, we used $26 million to repay certain loans against the cash value of life insurance policies.

The repayment of these loans is expected to reduce net interest expense by $1.5 million annually.

Looking to next year, it is our current intention to repay, with existing cash balances, our 5% senior notes in March 2015, at maturity.

At quarter-end, our total cash position exceeded total debt and capital lease obligations by approximately $288 million.

In February, we offered about 200 former employees in certain unfunded supplemental retirement plans the option for a one-time lump sum payment.

The amount of the settlement distributions connected with the offer, and the associated non-cash settlement charge in the second quarter, will depend upon the number of participants who elect the offer, and the associated pension benefit of those selecting participants.

This offer will not impact our qualified under-funded pension status, as the [sur] plans are non-qualified, and therefore, do not need to be funded.

The Company will benefit going forward from this offer through lower retirement expenses and a reduction in our overall pension obligations.

As I mentioned on our Q4 call, we expect our retirement costs in 2014 will continue to experience year-to-year volatility.

In 2014, we expect our retirement costs will increase $37 million, or by about $19 million, due principally to lower expected return on plan assets, resulting from a shift in asset mix to bonds from equity, higher interest costs, the impact of the sales in the New England Media Group on retired medical costs, and higher multi-employer pension withdrawal costs.

For the first time this quarter, and moving forward, we have provided a non-GAAP presentation of adjusted operating costs and adjusted operating profit in our earnings release.

And in each case, excluding non-operating retirement costs, in an effort to provide a clearer picture of our operating performance.

Our adjusted calculations remove financing and amortization costs related to historical pension, retired medial, and multi-employer pension liabilities.

Service costs for pension and retired medical benefits will continue to be included, but other pension components, including interest, expected return on assets, and amortization of actuarial gains and losses, which are not related to the operations of our business, will be excluded.

We refer to these costs as non-operating retirement costs.

We expect that non-operating retirement costs will approximate $8 million per quarter through the remainder of 2014.

These adjusted measures should provide us a supplement to our GAAP metrics.

We have included a reconciliation of adjusted operating profit to GAAP operating profit, and adjusted operating costs to GAAP operating costs, in our release.

We believe this view will make it easier to understand how our employee benefit plans affect our financial position and operating performance, allowing for a better long-term view of the business.

Moving to our outlook, second-quarter circulation revenues are expected to increase in the low single digits, as we expect to benefit from all our digital subscription initiatives, although revenue contributions for our new products in the initial launch period will be muted by introductory offers.

The most recent home delivery price increase will also have an impact.

Advertising revenues in the second quarter remain subject to month-to-month volatility, and are currently expected to be down in the mid-single digits.

April got off to a challenging start, and we do not expect to benefit from the same momentum we saw in the recent quarter, particularly on the print side, in part, due to more challenging year-over-year comparisons.

Second-quarter operating costs and adjusted operating costs are expected to increase in the low- to middle-single digits as investments around the Company's strategic growth initiatives accelerate, including costs related to initial marketing efforts for our new digital products.

We expect growth initiative costs to increase by approximately $25 million to $30 million on a year-over-year basis in 2014, bringing us to a total of between $45 million and $50 million in spending on these initiatives for the full year.

And with that, we'd be happy to open it up to questions.

(Operator Instructions)

Our first question comes from Alexia Quadrani with JPMorgan.

Your line is open.

A couple questions.

On the digital sub growth, you continue to have, in my view, very good growth in this quarter.

Is there anything you can say about how we should think about the digital subs number growth going forward, maybe in Q2 in the back half of the year, given how it might be impacted by these changes and new initiatives?

Then I have a follow-up question.

Good morning, Alexia.

It's Denise.

I think at this point, we're only three weeks in to the launch of two of our products.

And I think it's pretty challenging for us to determine what the growth pattern is going to be.

So I mean, I know you're looking for a lot more visibility here.

But I think it's just best for us to refrain from giving you any guidance at this stage.

I think certainly, next quarter, we'll obviously be sharing a lot more on this subject.

And then I'm assuming -- I'm not asking you share this with us, I'm asking theoretically.

I'm assuming you have a benchmark internally in terms of how many people that were subscribers to NewYorkTimes.com that may dumb down to the New York Times Now.

Would it be fair to say that you internally have a number that you look to, to assume, a certain amount to be expected to move down, that you watch that carefully, and if it becomes a lot bigger than that number you have anticipated, you can adjust the program?

Is that a fair way of looking at it?

It's Mark, here.

Did you say dumb down the first time?

(laughter)

That was a bad use of words, I apologize.

If they were doing that, they would be moving from one great package to another.

That's better.

You're more eloquent than I am on this front.

Obviously, one of the things that, obviously, that we're following very closely is -- we'll be following closely, is how people move between the different packages.

One of the points of having a portfolio is you'd like to move people up.

Times Premiere is an example of trying to move people up a portfolio, we'll keep a very close eye on movement both ways.

And certainly, our modeling has always recognized that some movement down was likely.

Okay.

And then the last question is on the advertising.

I know you have a bit more cautious outlook in the second quarter.

The comps are a little more difficult in Q2 than they were in Q1, but it looks like March was a strong month.

And I'm trying to read into it, your more cautious commentary on advertising, just because of the comps, or is it also because you're seeing some changing spending patterns that are making it a bit more conservative?

I think it's just still -- hi, this is Meredith.

I think it's just still a market with a lot of volatility, month to month, and that's why the visibility is limited.

It's hard to string a lot of information together, and call it a pattern yet.

I would say it's hard to believe that something radically has changed in the market between March and April.

Agreed.

I think that's just the world we're in.

We're constantly facing some pretty significant volatility.

Comps do play some part in it, but that's only part of the story.

And I think it's just a very volatile market, and I think it's likely to continue to be like that for a while.

Does Easter usually have an impact?

I can't remember.

In the past, I think Easter has had a more significant impact than it had this year.

And look, Easter for us, Easter would normally affect more retail and classified, and those are very small categories for us.

Minimal for us, so a slight impact on --

Yes, so we're in a different position from some of our competitors.

I think Gannett and McClatchy reported very recently, where retail is very significant, and therefore the move, at least out of Q1, they both said it had an impact on them.

It's different for us.

Okay.

Thank you very much.

Your next question comes from Craig Huber with Huber Research Partners.

Your line is open.

A few questions.

I'll start with two housekeeping questions, if I could.

Your print daily and Sunday circulation volume in the quarter, what was that percent change year-over-year, please?

Craig, it was down 6.5% on the daily, and 2.5% on Sunday.

Okay, and on the cost side for newsprint, please.

What was the average price percent change year-over-year, and also consumption?

The total raw material cost was down about $2 million.

A little bit more skewed towards volume than to price.

I would split that $2 million 60/40 with volume having more of an impact.

We don't tend to quote in our own price per ton, but I would say, generally on a year-over-year basis, if you look at [RZI], I think the RZI numbers were down about $10 ton year-over-year, or something like 2%.

Okay.

So you think roughly your average price down 2%, okay.

I was quoting RZI, I'm not quoting our own, but it was a small price benefit in the quarter, but it was more volume-driven than price.

Maybe I missed this.

But the monthly ad revenue percent change year over year, what was that for the first three months of the year?

And I'm curious how April is tracking relative to what happened in March?

I did in my remarks give the month to month volatility.

As I said, just a few minutes ago, March was up 6%.

I believe -- just give me one second.

January was up 4%.

January was up 4%, February was down 1%, and March was up 6%.

We're in the middle of April.

And we're not combining, we're in the middle of April, we haven't done the full April.

But I did say that April is off to a tough start?

Yes.

We did.

It's imbedded in our worldwide guidance.

So will say, [since April a big] month for us, it's a 5-week month, and doesn't actually close until the first week of May.

So we still have some time to go before we close the books on that.

Do you guys think that you're being -- your guidance originally for the first quarter for ad revenue turned out to be conservative.

Is there any conservativeness in your minds for what your guidance now is down mid single digits for the second quarter?

Well, look, here's what I would say.

March was up 6%.

What we were giving guidance, it was late January, early February, I don't recall, we didn't have a ton of visibility into March, and so that guidance was based upon what we saw in January.

And we're looking forward to a mild February, where we were looking at a decline of 1%.

And as I said, April is a pretty big month for us.

And we have some visibility there, that's what is embedded in our guidance for the second quarter.

And our guidance is based on trying to look at a mid case in terms of probability, not a low case.

As Jim said already, even in quarters, Q1 2014 and some of the late quarters in 2013, where we've seen it across the quarter, we've seen rather positive trends in advertising.

That's still been in the context of significant month-to-month volatility.

My last question or comment.

And please forgive the tone on this, it has to do with the retirement costs and how you're now presenting adjusted EPS, adjusted costs, excluding retirement costs.

I'm just curious, given the last 20-plus years, your company has always included the retirement costs in all of that stuff, all of a sudden now, you're asking your investors, you're presenting to take out the retirement cost.

What has changed here in your minds to do that?

And I also ask that in the context of your severance costs, as you know better than I do, the last 20-plus quarters, every quarter, you have booked severance charges, and people can take out if they want or not.

I'm just curious, the adjusted EPS number now, you want people to take out retirement costs, now.

What's the big change, why are you doing that now, and you haven't the last 10-plus years?

A couple things.

First of all, we're simply presenting it as additional information, and investors, analysts can do with it what they'd like, and we're not suggesting to leave it in or out, you can make that call yourself.

I will say though, as the business has gotten smaller, and the volatility in the plans have gotten quite significant, and we've been, for example, we've been taking a different approach to investing within our plan, where we'll be moving much more of our assets away from equities into fixed income, and it has a fairly dramatic impact on the quarterly results.

I think the key issue here is the business has gotten smaller, the plans don't get smaller, while they're frozen, they don't go away.

We increase and they stay the same.

And I will point out, just as an example, every quarter in this quarter, where what's flowing through pension expenses, about $7.7 million of amortization of losses that occurred several years ago, and the accounting rules require you to smooth that into the current period.

And we think as the base of your EBITDA has gotten smaller, these things tend to have an outsized impact.

We don't think actually really relates to the quarter.

Again, we provided a supplemental information.

Investors and analysts will use that as they choose, and we're not -- that's a whole lot from me.

My only concern, obviously, I'm sorry, is just in the second sentence of your press release, it talks about a $0.07 number, which is the adjusted number, which excludes the retirement costs, correct?

And that's the number that most people are going to pick up and hone in on everything.

And I like the fact -- I agree with you 100%, I like the fact that you break the retirement costs up in the last table of the press release, I appreciate that.

It's just that number there, it's just very interesting, that I've noticed more and more companies recently we cover take out the so-called bad stuff.

And you could make an argument that --

By the way, that number could very well go positive as well, at a point, too.

You can go this pretty far.

How much should the asset performance in the pension plan, which is not the Company, but the plan, impact reported results in the quarter?

People can debate that.

We think it has the potential to mask and distort underlying trends.

And those trends could go positive or negative for us, it's just in this quarter, pension expense was higher, next year, we could be having a different conversation.

And it's worth saying that we're not excluding all retirement costs.

We're distinguishing between retirement costs which we think are part of the operating business, and non-operating retirement costs.

That's right.

There are, by the way, retirement costs which are higher, embedded in the GAAP number, that are not isolated.

Those costs are up, as well.

Those costs, we expect to be up $4 million or $5 million.

So it's an important clarification.

We're not excluding all retirement costs.

We've chosen to distinguish between those retirement costs, which is we think you can completely fairly associate with the operating business, and those which are financial costs, which we think it's sensible to treat in this way.

But with complete disclosure, so if any investor or any analyst wants to consider it on a different -- on a GAAP different basis, they can do that, as well.

Thank you for the clarification.

Your next question comes from Doug Arthur with Evercore.

Your line is open.

Denise, the 39,000 increase in digital subs in Q1, that seems like a pretty big number, particularly because you had telegraphed these new products coming in April.

So one would have thought there might have been a slow down in the traditional tiers, in anticipation of the new tiers.

So I guess the question is, what drove the strong growth, and was there any particular incentives in the quarter to drive it, or was it better than you thought, or in line?

Yes, I said there's three things that drive the performance.

One is, we did experiment with a number of different promotional offers, and had good experience with those.

Two is that we saw really good growth from what I'll just call our emerging segments, international, corporate, and education in particular.

And then finally, as we talked about in prior quarters, we've really started to hit our stride with what I call our optimization efforts, be it retention of new customers or just the doubling down on testing and learning, around how to optimize our marketing, messaging, and offers.

So I think all of those things really contributed to the growth of the quarter.

And just as a --

And just to be clear, we're going to go for it on core, as well.

We've got these new products out there, but it doesn't mean that we're going to stop being aggressive on the core.

We still think that there's opportunity there, as well.

So I think the issue is balance balancing a portfolio and getting the right message to the right customer at the right time, and that's really the opportunity we have in front in us, as we roll out the new product suite.

Great.

And then just as a sort of ripple effect of this, are and notwithstanding your efforts in native advertising, as the digital sub universe grows, does it become a stronger overall sub platform to drive overall digital advertising throughout the network?

Or are the two -- do the two go hand in hand, or is it not that direct a correlation?

I'll let Meredith jump in here.

But in my experience, whenever you have a product that's well-received by a market, advertisers are willing to pay to reach that audience.

And I think the fact that we have a highly engaged, very affluent audience across platforms, and we know about these people, we have data on them because they are subscribers, puts us in a very differentiated position.

I agree entirely, and of a lot of our new ad product development will be around new digital mobile consumer product development.

NYT Now is a great example.

Cartier sponsored the launch of NYT Now.

They were excited to get in front of this new product, with this new audience, so I think there is opportunity for us.

Terrific, thank you.

Your next question comes from Kannan Venkateshwar with Barclays.

Just a couple of questions.

First, on the new product front, international product has now been around for some time, and the new branded version, and so on.

I'm just trying to understand how the underlying trends there look, and you mentioned that there's some strength there, but if you could just quantify what that looks like, that would be great.

And the second question --

Kannan, we said in our last earnings call that we're not going to break out international, just because our mix is going to change so dramatically with the launch of new products.

But we did see growth in the quarter, and there's a couple of things that we actually have coming up, that we're very excited about.

One is what we're calling a market domination program, where we go in and actually blitz a market, and make sure that consumers really understand what The New York Times is, and we'll evaluate the results of that and determine whether or not that's scalable to other markets.

That's rolling out very shortly.

As well as Mark mentioned in his comments, we've got the local currency rolling out in a couple of months.

So we're excited about that.

I know that will absolutely help conversion.

Okay.

So on the local currency front, if you could clarify, from a pricing perspective, does this compare in US dollar terms to what you're charging in the US?

It will.

But we will also experiment with differential pricing in the new markets.

But the first step is, right now we're billing everything in US dollars, and we really need to be billing in local currencies, so the first step is to do that, and then we will start to experiment with differential prices in differential markets.

Okay, and just to clarify, when Denise says we'll be launching that in a couple months, she means something in the couple mid-single-digit months, too.

Okay, and one question which might sound a little bit repetitive, is on the capital returns.

Now, in the past you've said, Jim, that you're look at the volatility in the ad market, and then of course the pension underfunding situation was a lot different in the past, and so on.

And therefore, those are the variables that you wanted some stability in before you took a call on there.

And now some of those trends seem a lot more stable.

So I wanted to get some updated thoughts from you on how you look at capital returns going forward.

Under close watch.

Look, I agree, we've certainly made some progress, we certainly feel good about the business.

I think we pointed to a number of things, including a higher level of leverage that we think is appropriate, given the divestitures we have gone through.

I have suggested in my remarks that we'll be taking some of that cash and applying it towards a maturity that will be -- or about inside a year.

So the deleveraging is still one of our top priorities.

And look, we'll continue to evaluate.

We have just nothing more to share other what we've said.

We feel fairly good where we're at in our transition of this business, and the flexibility that provides us.

And we and the Board keep it under very close watch.

And to add to that, yes, we think we are making process.

I have mentioned that in my remarks, as well.

But we also think we're still in the middle of a large-scale transformation of the business, towards digital and towards new sources of growth for the business.

We don't think that we've yet achieved everything we need to achieve.

And I'm not ashamed in the slightest at the fact that we're continuing to take a relatively conservative view of the balance sheet.

One follow-up question on that, Jim.

On the debt side of it, I think in the past, you've mentioned that the goal is not to be debt-free, but is there some kind of a leverage number that you have in your mind at which you think the capital structure looks more optimal?

It is in my mind.

(laughter)

You should see him, Kannan, he looks like a man who is pretty determined in his mind, and won't put it in his mouth.

(laughter)

I think the flexibility right now is what we feel most comfortable with.

We'd prefer, just given the host of the things that are happening in this business, to retain some flexibility and not -- I'm just not prepared just at this moment to make that commitment.

And like I said, we demonstrated last autumn with the return of the dividend.

We actually do not have a --

Aversion.

An aversion to the idea of returning capital to shareholders.

And this is one part of the way we think strategically about the business.

At the moment, a pretty conservative perspective on the balance sheet, but keeping it under review.

Great.

Thank you.

Your next question comes from William Bird with FBR.

Your line is open.

A question for Denise.

Denise, do you think the 39,000 in digital sub additions for the legacy product is sustainable in Q2?

Then I have a follow-up.

Let me just say this, as we said, we're not going to give guidance on Q2, because there's still a lot of stuff happening in the quarter.

One thing I will say is that Q2 is always seasonally our lowest quarter.

So I think you should factor that, for the core product, I think you should factor that into the thinking.

And as well as I mentioned, there was a lot of promotional testing going on in Q1.

Some of that will sustain itself, but some of it is one-time efforts that won't repeat.

So those two things will have an impact, as well.

Obviously, the new products will have an impact on a lot of other things, which is why we're not giving guidance on the numbers in the quarter.

But we have given our revenue guidance.

Whatever our views of that is, we've embedded in that number we've given on revenue.

Thanks.

And a question for Jim.

Just to clarify, is your down mid single digit ad guidance consistent with the April trends?

I would say it embeds the April trend, and it's consistent with what visibility we do have beyond April.

I will say April is challenging, May less so.

I think it's a start of a blend of a number of different factors.

And you can look at that on a regular basis, and that's our best view at this moment.

And I might have missed it, but on the strategic growth initiative costs, how much are still ahead of us?

So here's the way it's going to happen.

Big growth, year-over-year cost growth, virtually all are -- I'd say 80% of our cost increase in the first quarter was related to growth initiatives, because we had almost no spending last year in the first quarter related to this.

We will see a fairly big bump in spending in the second quarter, because we'll be marketing for the first time, so we'll see some pretty big growth year over year.

So we gave some guidance around that.

Once you get in the back half of the year, that should moderate, because you're beginning to comp against spending that took place last year.

Although it will be higher, it will be quite a bit more muted.

So I would say on a year-over-year growth basis, second quarter should be the highest, on a year-over-year basis.

Then it will retreat a little bit on a year-over-year basis in the third, and go down pretty dramatically in the fourth.

But net-net, year-over-year change, somewhere around $25 million or $30 million.

Great, thank you.

There are no additional questions at this time.

I would like to hand the call back to the presenters for any closing remarks.

Yes, thank you for joining us this morning, and we look forward to talking to you again next quarter.

This concludes today's conference call.

You may now disconnect.