New York Times Co (NYT) 2015 Q3 法說會逐字稿

Good morning my name is Jessa, and I will be your conference operator today.

At this time, I'd like to welcome everyone to the New York Times Company third-quarter 2015 conference call.

(Operator Instructions)

Thank you.

Mr. Harlan Toplitzky, Executive Director of Financial Planning and Analysis, you may begin your conference.

Thank you, and welcome to The New York Times Company's third-quarter 2015 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 Revenue 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 2014, 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.

This was a strong quarter for the New York Times Company on many fronts.

We increased our overall revenue, decreased costs, and achieve 19% growth in adjusted operating profit to $48 million in the quarter.

Our digital subscription business was a particular highlight.

We added 51,000 net digital subscribers in the third quarter, the largest number of net subscribers we've added in the quarter since Q4, 2012.

The number exceeded our expectations and demonstrates our ability to strongly grow our digital subscriber count, more than four years after we launched our pay model.

We attribute the success in the quarter to improved acquisition of attention tactics.

With notable progress in the individually sold education subscriptions, demand for which has boosted in the third quarter by the start of the school year.

As well as continued advances in group corporate and education, and in individual international sales.

As we announced in the last call, we passed the 1 million digital-only subscriber mark early in the quarter.

Overall, digital-only circulation revenue growth was a solid 14%.

During the course that Clay Fisher joined the Company as SVP of Consumer Marketing from DirecTV.

We believe that there remains considerable further scope to optimize and extend our digital-pay model in the future, as well as to improve acquisition and retention tactics in print.

And Clay and his team will lead that effort.

There was a slight decline in print consumer revenue, as the decline in copies sold more than offset the benefit of January increase in home delivery prices.

The progress on the digital side meant that overall circulation revenue grew year over year by 1.1%.

This was the best advertising quarter of the year, despite a 5% year-over-year decline in digital advertising revenue.

Which was the result of fewer non-repeating technology and luxury launch campaigns, and tactical shifts in a few categories.

As well as some impact from the transition to the new viewability standards that occurred at the beginning of the quarter.

Mobile, video and papers all grew strongly in the quarter.

We remain bullish about our digital advertising business, and expect an immediate sequential improvement and return to mid-single digital year-over-year growth in Q4.

Despite even tougher comps and some continued impact from the shift of viewability.

We're seeing early success with our new mobile app product, Mobile Moments.

Which as we described in August, focuses on key moments of a user's day when Times journalism is particularly helpful in keeping readers informed and inspired, with targeted short stories created by marketers or by our T Brand Studio.

And we believe we have a great deal more room to grow our branded content effort.

We recently launched T Brand Studio in London, and we're already seeing strong demand for both the content and creative services that T Brand Studio provides to its clients.

This is a business in which we see considerable potential.

On next weekend, the Times will bring virtual reality to our readers with a slate of new VR films, a new Times VR app, and the distribution of more than 1 million Google cardboard viewers to our home delivery subscribers.

This is precisely the kind of cutting-edge experimentation and powerful storytelling that we're uniquely positioned to bring to our readers.

Sponsors GE and Mini will both deliver VR films as part of the experience with GE's film created by T Brand Studio.

VR branded content and Mobile Moments are all examples of innovation that improve the reader experience, and meet marketed hunger for compelling new ad solutions.

They will all stimulate further growth in our digital advertising business.

Now ad blockers have been much in the news, so perhaps this is a good moment to give our your perspective on that topic.

As you know, the Times' digital subscription revenue stream means that we're significantly less exposed than most publishers to the impact of ad blockers.

Nonetheless, let me make it clear, that we oppose ad blocking.

The creation of quality news content is expensive, and digital advertising is an important way in which we and other high-quality news providers fund news-gathering operations.

We are exploring a number of options, including but not limited to, technical solutions to mitigate the impact of ad blockers should the threat increase.

Let me turn now to print advertising, which was down only slightly compared to the same quarter a year ago.

As we saw gains in print advertising in the New York Times, tempered by the international New York Times, web-print advertising was down.

As you've probably heard, we've also had something to say recently about our future strategy.

The core message is a simple one.

Over the past five years, we've doubled our digital revenue and we now believe we have the opportunity to double it again to around $800 million by 2020.

We plan to do that by reaching out to new audiences at home and abroad to more than double the number of the most engaged users.

By further growing both our digital circulation and advertising businesses, by further developing our video and branded content businesses, and by exploiting other B2B and B2C opportunities.

I don't propose to offer you a detailed breakdown today, but I do look forward to briefing you on progress on this ambitious strategy in future calls.

Before I conclude, I did want to make a brief comment on costs.

We again achieved success in decreasing operating costs in the quarter.

As I've said in the past, managing our cost structure continues to be a top priority, especially in our print products and services operations.

As evidence of this, earlier this month, contracts were ratified with three of our trade unions, which will achieve cost savings beginning in the fourth quarter of this year.

And now I will turn it over to Jim Follo for a more detailed financial review.

Thanks, Mark, and good morning, everyone.

As the quarter was highlighted by strong growth and profitability, driven by solid digital consumer growth.

A robust increase in New York Times print advertising, and good cost control.

We delivered this solid performance, despite the fact that digital advertising had a challenging quarter.

Adjusted operating profit rose 19% in the quarter to $48 million.

And adjusted diluted earnings per share was $0.09 in the third quarter, compared with $0.03 in the prior year.

We reported GAAP operating profit of approximately $22 million, compared to $9 million operating loss in the same period of 2014.

Circulation revenues increased approximately 1% in the quarter, with our digital-only subscription revenue stream more than offsetting print declines.

Digital-only subscription revenues were approximately $49 million in the quarter, an increase of 14% from the same quarter in 2014.

We benefited from January's home delivery price increase, although higher revenues associated with the new rates was outweighed by overall print volume declines.

The print decline was driven by lower single-copy revenues.

Advertising revenues were down 2% in the quarter, with print advertising declining 1% and digital declining about 5%.

The more modest print advertising decline was due to growth in the New York Times, its first quarter of growth since Q1 of 2014.

Which was more than offset by lower advertising in the International New York Times.

In the New York Times, luxury, technology and telecom, travel, and home furnishing categories all performed well in the quarter.

While entertainment, financial and advocacy advertising were weak.

The decline in the International New York Times was primarily driven by a decline in the luxury category.

As usual, we experienced month-to-month volatility in advertising revenues.

As illustrated by the fact that overall advertising was up 1% in July and August, while September advertising declined 6%.

Finally on the revenue side, other revenues increased 16% in the quarter.

Building rental income, crosswords, and NYT Live all contributed to the growth.

Operating expenses decreased again in the third quarter by nearly $28 million overall, while adjusted operating costs declined $4.9 million or 1.5%.

Operating costs declined in the quarter, mainly due to severance, depreciation and amortization, as well as print distribution efficiencies, and decreases in raw materials and outside printing costs.

Our focus on reducing legacy costs remains a top priority, while at the same time, we will continue to invest in growing our digital businesses.

Our non-operating retirement costs were up in the quarter at $9.4 million from $8.3 million in the prior year.

Due to a higher multi-employer pension plan withdrawal obligations.

Moving to the balance sheet, our cash and marketable securities balance was $873 million.

And our total cash position exceeded debt and capital lease obligations by approximately $443 million.

The Company has repurchased approximately 4.86 million shares of our Class A stock for $61.1 million as of October 27, under our previously announced $101 million share repurchase authorization.

Moving to our outlook for the fourth quarter.

Circulation revenues are expected to increase at a rate similar to the third quarter trend, driven by the benefit of our digital subscription revenue growth.

Partially offset by lower print circulation revenues.

We expect the total number of net digital subscriber additions to be approximately 40,000 to 45,000 in the quarter.

Overall advertising revenues are expected to be down in the mid-single digits.

As Mark has already mentioned, the tough year-over-year comparisons and the impact of viewability means that we expect to grow digital advertising revenues in the mid-single digits.

Other revenues are expected to also increase in the mid-single digits.

And fourth-quarter operating costs are expected to decline in the low to mid single-digits, with severance and non-operating retirement costs declining.

And adjusted operating costs are expected to decline in the low-single digits.

And with that, we will open it up for questions.

(Operator Instructions)

Your first question comes from the line of Alexia Quadrani from JPMorgan.

Thank you very much, just a couple of questions.

First on the digital advertising revenue growth in the quarter and the outlook for Q4.

How much of the weakness was timing?

And I know you're a bit more optimistic about the Q4 outlook for digital advertising, how much visibility you have at this point in the December quarter on the digital advertising side?

Good morning Alexia, thanks for the question.

I would say you're right, it's a moment in time, and we are fairly bullish about our continued ability to grow digital advertising.

I know Jim just shared the guidance, and we have pretty good visibility into Q4 at this point.

What I'll say about Q3 is that we saw pressure on standard rotational display advertising.

And at the same time, we continued to see pretty brisk growth in branded content, in mobile, and in video.

Also point out that Q3 is our smallest quarter of the year, so and Q4 is a much bigger quarter.

And I think it's really worth saying, Alexia, that the structural changes which we're seeing in the [world] of digital advertising industry, we, I think, for at least a year, have been aware of some of the likely changes in the industry.

Our investment in areas like branded content, where we are incredibly pleased with progress so far.

In video, and now in virtual reality, in new ad units for smartphone.

All of these are examples of us trying to in a sense build and in some ways build new areas of growth in digital advertising.

And notwithstanding, some of the one-off issues in Q3, we're very pleased with our progress.

Yes, and I would say demand for to your question about outlook for Q4, demand for all of the things that Mark just mentioned is very, very strong.

And I guess my same question on the print side, the print number, particularly domestically, was very impressive.

But yet there's a bit of cautiousness or a bit more conservatism maybe in the outlook for December, and I think you did mention tougher comps.

I don't want to read too much into month to month because there is always so much volatility.

But September looks a little bit weaker than the earlier part of the third quarter.

Any color again on visibility into maybe October or the December quarter in general, and just any more detail maybe on the guide.

I'll say, October has not been a particularly strong month, but November on both platforms looks very brisk and demand is quite good.

Again, on the digital side, especially as a lot of the work moves into things like branded content and virtual reality, we are starting to get more and more visibility and we feel optimistic.

Print is still very volatile, and you see a lot of change from month to month, so harder to call.

Okay.

Thank you very much.

Your next question comes from the line of Craig Huber from Huber Research.

Yes, good morning.

I'm just curious on your comments there about October and November.

What is your sense that's changing on the print side there and through the advertising categories, what's getting better and what's potentially getting worse?

Yes, that's a great question.

Morning, Craig.

We've seen in Q3, and I think this will continue in Q4, real briskness in the luxury business.

We saw will briskness in Q3 in the technology business, I think that will continue.

And then there other categories like retail, where we just have less visibility and where there tends to be more volatility.

This isn't very helpful if you're just trying to construct a model, I know, Craig.

But the point of our volatility, is our practical experiences with being in a weak month, does not give you much guidance about whether the next month we'll be weak or strong.

And the strength in November after October would be an example of that.

I think what you can say stepping back and looking a print, is that the second half of 2015 is turning out to be, net in the US, stronger than the first half.

I will say two other things about that.

In the areas where we have made innovations and investments in print like T and the Sunday Magazine and our new Men's Style section, we are continuing to see very nice growth there.

So to the extent that that's helpful as you think about the rest of the year.

That's definitely important -- an important part of what made print fare so well in Q3.

Then also, some detail on the digital ad revenue please.

Curious, what is the updated percent that comes from mobile advertising on the digital side versus video, please?

We're still seeing nice growth in mobile, so I think we're just under 20% in Q3.

Which we are excited about.

And as Mark has now mentioned a couple times, we put a new mobile app product into the market, a unit called the Flex Frame and a product called Mobile Moments.

And that launched pretty late in the quarter, and there's quite a bit of demand for that.

So I'm optimistic about mobile continuing to grow in general, and as a percentage of the business.

Video is still a relatively small percentage of the business, but growing, and branded content is becoming a much more meaningful percentage of the business.

It's obvious that we won't disclose numbers.

But the initiative we're doing in virtual reality is going to significantly boost advertising revenue from video over the coming weeks.

And then also, I just wanted to ask given all the discussion about the advertising blockers out there.

So I'm curious what your potentially contemplating?

And I ask this in this context.

Sometimes when I notice when I go on the Washington Post website, I'll get a window that pops up and it will ask me to turn off my ad blocker if I want to read the rest of the article.

Isn't this situation pretty simple to put in place and put a window that pops up to tell me to turn off my ad blocker so you can get that ad revenue, otherwise I can't see the article?

(Multiple speakers).

They're giving you the right advice there.

But, Meredith, do you want to talk about it?

I should also just get rid of my DVR as well.

We should all be told to do that, right?

Mark gave our Company position on ad blockers, this is a situation we're monitoring very closely.

I think the Times is at industry average in terms of the rate of adoption of ad blockers on the web where they're most prevalent now so far.

And what I would say is, we're looking very, very closely at this.

And exploring a range of options that would advantage us in terms of how we interact with our readers, how we run our subscription business, and how we continue to drive a meaningful advertising business.

I think one of the underlying reasons for ad blockers is the idea that digital advertising in general in the industry has not been seen by the end user as good enough.

So we're hard at work at making better digital advertising and creating more relevant experiences for our users that match the surrounding New York Times product and editorial experience.

As Mark said, lots of technical work and experimentation underway as well to deal with the issue.

Sorry for the editorial, but just for the Washington Post experience I briefly described here.

Having a window pop-up asking to turn off my ad blocker so I could read the article, certainly, I didn't view it very onerous, I thought it was fair if I verify wanted to read the whole article I got to let some advertising flow to me and stuff.

It seems like a very simple thing to put in place, and you guys are one of the industry leaders out there, particularly on the pay wall.

Don't understand maybe why you guys (multiple speakers).

As we've suggested to the world in our pass forward memo, we are incredibly focused right now on our most engaged users and their experience.

So we're evaluating all options with an eye first toward what is the best possible user experience that we can provide.

And we ultimately need to make sure that experience is consistent with our business model.

And you can certainly expect to see us experimenting.

We'll do this methodically, but experimenting with different solutions.

Exploring reader reactions and working out what works best, and also I'm learning as -- because yes the technologies behind ad blocking are themselves changing very rapidly.

You can see us developing our responses over the coming months.

My last housekeeping question please.

On the print volumes for the quarter, daily and Sunday, what was the percent change there year over year please?

Daily down 7.4%, and that had some to do with the late Labor Day and the timing of that in the quarter.

Sunday down 5%.

Great.

Thank you.

Your next question comes from the line of Doug Arthur from Huber Research.

Yes, Mark, I know you don't want to get into a deep dive on your $800 million digital target by 2020.

But in Dean Baquet's Treatise, the past [forward].

He talks about moving from a broadcast model to a one-on-one relationship with readers, and that smartphones and mobile distribution is key.

Do you have the wherewithal to make that transition now?

Or is this going to be involve a significant investment to get there in terms of the data necessary for a more customized relationship with your readers?

How do you see that playing out?

Thanks.

You'll understand, Doug, that we already are set up with a very big and talented product data and technology arm.

Which is constantly trying to optimize our digital products and make them increasingly more relevant to users in America and around the world.

I think the pathway of -- before I answer you, I'm co-author of that.

And the idea of driving a deeper engagement, recognizing the connection between deeper engagement and monetization both through digital subscription and through digital advertising.

And the idea of driving deeper engagement by making our journalism and our digital products more and more relevant and indeed indispensable to readers here and around the world, is the centerpiece of our strategy.

We believe that, as I said my remarks, Clay Fisher has just arrived as SVP of Direct Marketing from DirecTV.

We believe, and I think you can see it in our numbers in this quarter, there is a lot we can do as it were with near at hand or ready significantly engaged audiences who we can, as it were, bring further into the fold.

That's step one.

Doing more fundamental audience engagement work.

We started that seriously after the innovation report last year to begin to, as we develop and prep audiences who are somewhat further out, and learning continuously by understanding their behavior and what works for them.

And thinking about user context.

Which user context can be personalization, it can simply be detecting where a given user is in the world.

And everything from time of day to what kind of sports are they likely to find the most interesting.

Optimizing the experience in that regard.

We will probably have more to say in subsequent earnings calls about how we think of the investment profile.

But to be clear, we're trying to build a New York Times company which is continuously engaged with its audiences.

And continuously improving the relevance and value of what we do, our journalism, the user interface, the whole user experience.

So rather than seeing this as entirely, needing injections of large amounts of new money, this is making the most of our existing operations as well.

But I'm sure in future calls, we will have a little bit more to say about the investment profile.

Okay, that's helpful.

And then in terms of the acceleration in the digital subs of 51,000, how big a role is capturing more international subs playing in that acceleration?

I know you went to -- I believe you now have a number of countries with local currency pay methods.

Do you feel you're still just scratching the surface internationally, or are you well on your way to realizing your opportunity there?

I would say we're just at the beginning of realizing all of the audiences in the world who want to engage with the New York Times.

So we expect this will continue to be a real growth area for us.

We made some important executional improvements over the first part of this year, and you saw the strength in international, and our second quarter number I think you'll see that again going forward.

So we're very optimistic about international.

And I'd say it's an area where we will continue to put effort and resources, and we have a fairly clear path, at least in the near term, to continue to do things that improve the customer journey including more in currency billing.

So you see, for example, a very to direct result when you move to in currency billing in that market.

And we have a number of other things like that that we are just beginning to implement.

Great, thank you.

Your next question comes from the line of Kannan Venkateshwar Barclays.

Thank you, just a couple from me.

First is, Mark, you've been on the video side of the business for a big part of your career.

But when we look at others in the industry like it's getting major valuations around video and then launching their platforms internationally.

And given the kind of brand equity that you guys have and the content that you guys have, why hasn't [neon pens] been more aggressive around video and the strategy around that platform?

So this is an interesting question.

Obviously, Kannan, one, there is a mark back down in TV.

One of the things it's taught me is there's a significant difference between entertainment and news, in terms of audiences and so forth.

And short form, entertaining and entertainment video, in many guises, we are seeing some astonishing consumption numbers in America and around the world.

It's not is as clear to me that there are breakout examples yet in the more serious hard news categories.

However, what I do want to say, I mentioned VR as an example of innovation [about the] Times in video.

We are looking, we are in the process of changing the leadership in video.

I expect to continue to invest strong in video.

I think there is much more we can do.

We have seen with T Brand Studio how we can bring innovation and creativity, and get really dramatic revenue growth in a business by finding the right creative solutions.

I'm working very closely with Dean Baquet, with Meredith, with Kenzie Wilson, and others in looking at video.

With a view that's saying, over the last couple of years, we've done a lot to improve the quality of video.

I think we have got a lot to be proud of there.

We've been gathering many awards from that.

In terms of scale and impact, I don't think we've yet achieved as much as we can.

And one of the areas I look to growth in 2016 and the years after that is by significantly beefing up the impact, and ultimately the revenue we get from video.

And I think I'll just say on the revenue side, it's worth saying that as branded content becomes a much bigger business for us, a more meaningful part of the business, we are doing -- we are producing more and more work in video or multimedia.

So it is becoming a substantial part of the digital ad revenue.

Video specific branded content.

Thanks.

And separately on the digital front, and given the kind of scale that you guys are talking about now and $800 million and so on potentially doubling the top line.

Are there alternative structures for the Company to reflect the value of that business better than it does today, whether it's in the form of a tracking stock -- or is that even part of the discussion internally or is that something that is you would focus on going forward?

What I want to say, Kannan, it's really worth saying that we are a journalism play.

We are a news and features and opinion provider with multiple platforms.

And we're very interested in the synergies between the platforms.

I would say that our ability to move 1 million plus pieces of carboard, Google carboard, to our physical home delivery subscribers.

So they can use their smartphones to use the New York Times app to look at virtual reality.

Is an example of how we think of -- and when I think of print and indeed the magazine potential within print: web, smart phone, live events, NYT Live.

We have big ambitions for our live event business, as multiple platforms which add up to more than the sum of the parts.

And of course, we will always look at whether there are superior ways of expressing the total value of what we do.

But as an operating company, I'm very interested -- I believe print is going to be with us as a highly cash-generated, albeit mature business, for many years to come.

I don't want to lose the advantage we can have if we run our business well of synergizing between these different platforms.

Great.

Thank you.

There are no further questions at this time, and I turn the call back over to the presenters.

Thank you very much, and have a good day, everybody.

Good-bye, everyone.

Thank you.

This concludes today's conference call, you may now disconnect.