New York Times Co (NYT) 2015 Q4 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the New York Times Company Q4 and full-year 2015 conference call.

(Operator Instructions)

Thank you.

I will now turn the call over to 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 fourth quarter and full-year 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 would turn the call over to Mark Thompson.

Thanks, Harlan.

And good morning, everyone.

Well, as you can see from the results we released this morning, we had a strong quarter and an encouraging 2015 and we begin 2016 with high hopes for the future.

Let me deal first with the quarter, briefly review the past year as a whole, and then turn to 2016 and beyond.

In Q4 2015, we saw adjusted operating profit of $118 million, a 13% increase versus the prior year, driven by solid growth in digital advertising and consumer revenues, as well as good cost management.

We had another quarter of strong net gains in digital earning subscriber numbers, with an additional net 53,000 subscribers.

It was the biggest quarterly addition for three years and represented a 20% growth in subscriber numbers compared with the same quarter in 2014.

Continued improvement in retention and growth of international subscribers, and the success of target pricing to specific market segments like college students all helped us maintain momentum.

We believe our digital pay model has great potential and that is being borne out in the acceleration we're seeing in year-over-year subscriber growth numbers, as well as the related revenue growth.

In our last earnings call, we predicted a return to revenue growth for digital advertising in the fourth quarter and we achieved that.

Indeed, we did somewhat better than we predicted, posting an 11% year-over-year digital advertising revenue increase in Q4.

Rapid growth in mobile ad revenue was an important factor, as was intense demand for the production and distribution of branded content.

Important also was the November launch of the New York Times VR app, not to mention the distribution of more than 1 million Google cardboard virtual reality viewing devices to our subscribers.

Total revenues for the quarter were flat at $445 million, with strong digital performance offsetting a moderate print advertising decline, as well as a slight decline in print circulation revenue.

Significant cost control also accounts for the substantial increase in profitability.

Let me now consider 2015 as a whole.

In the fall we published our path forward, a short statement about strategic ambitions for the coming years.

Central to those ambitions is our determination to double our pure play digital revenue over the next five years, and it was very encouraging to see tangible steps towards that target in 2015.

During the summer, we passed the 1 million digital-only subscriber mark and we ended 2015 with 1.1 million digital subscribers.

We expect to end 2016 with more than 1.25 million digital-only subscribers.

The digital advertising market is undergoing profound change, and we're not immune to its volatility, but we believe that our strategic approach to rapidly build out new high-value propositions for marketers in branded content, mobile, video, and VR, is paying off, with strong growth in three out of four quarters.

We will continue to invest in advanced story technology and talent, in mobile ad innovation and in a broad range of services to help advertisers reach their target audiences on our own assets and also across other platforms.

T Brand Studio is a particular success story, with no fewer than 120 campaigns launched for 70 advertisers since we started the business in January 2014, just two years ago.

We don't expect digital advertising revenue growth associated with these new growth areas to be even across the year, but we are confident that we have the talent and the drivers in place to make 2016 a year of strong digital advertising growth.

Print advertising continues to vary unexpectedly month to month, but the significant [falls] we saw in the first half of the year moderated somewhat in the second half.

As you will hear, so far at least, that more moderate picture is extending into early 2016.

Print circulation revenue followed a more predictable pattern with home delivery price increases compensating for most, but not quite all of the volume declines both in home delivery and single-copy sales.

Adjusted operating profit for the year was up to $289 million compared to $256 million for 2014 due to lower costs and strong digital revenue growth.

I might add that 2015 was a very strong year for Times Journalism, with exceptional work in international news, where our continued investment in global news gathering enabled us to cover stories like the refugee crisis and the Paris attacks with more depth and focus than any other news provider, as well as investigations and features.

I think it's also worth noting the exceptional and innovative coverage of Tuesday's Iowa caucuses.

We saw traffic totals in the top 1% of all traffic days in the history of the New York Times, and very high levels of engagement, including the highest number of readers we've ever had on our live blog during the 24-hour period.

The presentation of the story on Smartphone complete with animating infographics broke new ground.

So what are our plans for 2016?

Our path forward calls for us to reach out to new audiences at home and abroad to substantially grow the number of the most engaged users, to further grow both our digital circulation and advertising businesses, to develop our mobile video and branded content businesses, and to exploit other B2B and B2C opportunities.

Over the course of 2016, therefore, we expect to invest judiciously in growth, to develop content for targeted international audiences, and to market the Times more effectively to them; to grow our multimedia capabilities in video, VR, and audio; to further build out T Brand Studio; and to extend the package of services we offer our advertising partners, as well as other initiatives.

But one of our achievements in recent years has been to combine investments in digital growth with a tight grip on costs, and we're still determined to focus on both.

Over the coming months, we will take a close look at our existing cost base, even as we make targeted investments in our digital future.

We know that success for us depends on the quality of journalism we offer our users here and around the world, and we must maintain that quality.

Nonetheless, we believe that alongside investment in our newsroom and elsewhere, there is scope for further structural savings across our cost base.

Deep into its digital transition, the New York Times Company, unlike many of its rivals, remains a very profitable Company and we're determined to grow that profitability just as we did in 2015.

Although in 2016, we expect our investments in digital will put downward pressure on operating profit, we are committed to returning to operating profit growth as soon as we can.

In summary, I see 2016 as an investment year, building on our strategy and some of the key successes of 2015.

I see it as a year of continued transformation of the business to meet the changing needs of our customers, and a changing market.

And I see it as a year in which we take the necessary steps, both to double our digital revenue over the next five years, and to grow the Company's profitability in the long-term.

But now let me hand over to Jim.

Thank you, Mark.

And good morning, everyone.

As Mark said, we closed 2015 with a solid fourth quarter, highlighted by strong growth in profitability, driven by solid digital consumer and advertising performance, and good cost control.

Adjusted operating profit rose 13% in the quarter to $118 million, and adjusted diluted earnings per share was $0.37 in the fourth quarter, compared to $0.26 in the prior year.

We reported GAAP operating profit of approximately $88 million, compared to $62 million in the same period of 2014.

Overall revenues were flat in the quarter, with strong digital revenue growth offset by weakness in print revenues.

For the full year, adjusted operating profit also grew 13% to $289 million, while operating profit grew 49% to $137 million, on revenues that were down less than 1%, or $9 million.

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

Digital-only subscription revenues were approximately $50 million in the quarter, an increase of 13% from the same quarter in 2014.

On the print circulation side, we benefited from January 2015's home delivery price increase, although higher revenue associated with the new rates was outweighed by overall print volume declines.

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

We again implemented a home delivery price increase at the beginning of the first quarter of 2016 at a rate similar to recent annual price increases.

Advertising revenues were down 1% in the quarter, with digital revenue growing 11% and print advertising declining 7%.

The digital advertising performance was particularly encouraging, given the tough year-over-year comparisons, where digital advertising grew 19% in the fourth quarter of 2014.

Digital advertising reflected strong growth in mobile, branded content, and creative services revenue.

Revenues from our initial slate of VR films in the quarter also contributed to growth.

Mobile revenues continued to grow at a rapid rate versus 2014, up 72% in Q4, and 58% for the full year, and represented approximately 22% of total digital advertising revenues in the quarter.

The lower print advertising revenue was due to declines in the New York Times and more significant declines in the international New York Times.

In the New York Times, luxury, media, travel, real estate, and home furnishing categories all performed well in the quarter, while entertainment, financial, technology, and telecom advertising were weak.

The decline in the international New York Times was mainly driven by a decline in the luxury category, and foreign currency exchange rates also played a part in that decline.

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

Our quarterly performance strengthened as the quarter progressed, as illustrated by the fact that overall advertising was down 9% in October, flat in November, and up 7% in December.

And finally, on the revenue side, our revenues are flat in the quarter.

That category includes NYT Live, which is our live events business, our crossword product, building rental income, digital archives, and others.

Digital archives and building rental income grew in the quarter, but were offset by declines in NYT Live and our retail store.

The decline in NYT Live was in part due to the postponement of our luxury conference in Paris.

Operating costs decreased again in the fourth quarter by nearly $30 million overall, while adjusted operating cost declined $14 million, or 4%.

Operating costs declined in the quarter mainly due to print production and distribution efficiencies, declines in severance, depreciation, amortization, and raw material costs, as well as lower marketing and promotion, benefits, and nonoperating retirement 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 revenues.

Our nonoperating retirement costs were down in the quarter to $7.5 million from $11.2 million in the prior year, due to both lower pension interest expense and retiree medical costs.

Moving to the balance sheet, our cash and marketable securities balances was $905 million and our total cash position exceeds debt and capital lease obligations by approximately $473 million.

While our qualified pension obligations declined at year end, due to a rise in discount rates from prior year, plan asset performance trailed our expectations, thus our unfunded qualified pension obligations ended the year roughly flat with the prior year at $273 million.

The Company has repurchased approximately 6.5 million Class A shares for $83 million to date as of February 2, under our previously announced $101 million share repurchase authorization.

Let me conclude with our outlook for the first quarter of 2016.

Circulation revenues are expected to increase at a rate similar to the fourth quarter trend, driven by the benefit of our digital subscription revenue growth, partially offset by lower print circulation revenues, despite the impact of the home delivery price increase.

We expect the total number of net digital subscription additions to be about 50,000 in the first quarter.

Overall, advertising revenues are expected to be down between 2% and 4%, with digital advertising revenue growing in the mid single digits.

Other revenues are expected to increase approximately 10% and first-quarter operating costs and adjusted operating costs are expected to increase in the low single digits.

Due primarily to a change we are making in calculating interest costs on our legacy pension obligations, we expect nonoperating retirement costs to decline by about $4 million in the first quarter to $5 million.

As Mark stated in his remarks, as we look out for the full year, we expect adjusted operating costs will increase in the low to mid single digits, as we invest in certain areas of the business that we believe we can grow over time.

We will continue to maintain a strong cost discipline that we exhibited in the past, but are willing to invest in areas of growth.

With that, we would like to open it up for questions.

(Operator Instructions)

Your first question is from William Bird with FBR Capital Markets.

Good morning.

Mark, I was wondering if you could talk a bit about where you're focusing your digital investments in 2016?

And maybe if you could talk specifically about what you're doing in the areas of digital video and marketer insights.

Thank you.

Good morning, Bill.

I don't want to add much to what I said in my remarks really.

But I expect investment both in, as it were, conventional video.

We have a great new leader of our video efforts in Alex McCallum at the Times and I expect to invest in more conventional video.

We also want to back up the success we had in Q4 2015 with the launch of VR, the VR app and the delivery of more than 1 million Google cardboard viewers to our subscribers, with more investment in VR capability.

On the marketing side, I might hand over briefly to Meredith, but we believe we've got a really rapidly growing business in T Brand Studio and we think the range of services that we can offer, as you know, where in T Brand Studio, we are making content for advertising partners.

We think the range of services we can offer those partners could be broader than it currently is and we are reinvesting in that.

But, Meredith, do you want to talk about the market side?

Sure.

Good morning.

I think Mark actually headlined it very well.

I'll say we had a very good year in T Brand Studio and we're doing very well in helping marketers develop the right creative.

We are also seeing quite a bit of demand for distribution of that creative and we're building out our portfolio of services to be able to help them do that.

We're building out our capability and expertise at making the content, branded content at the point of discovery richer and more compelling.

And I would say we're going to keep investing in people and technology capabilities around advanced story-telling format.

So VR is one of them, but there are many others.

And separately, could you talk about your current perspective on your plans for utilizing your growing cash balance?

Thank you.

Jim, do you want to tackle that?

Sure.

I will.

We're still executing under our share authorization program.

And as I said, we're probably a little bit more than $80 million into that.

We'll continue to evaluate that, but we did say we would put that in place, that was kind of a one-off issue where we would be essentially offsetting the dilution from a [warren excise] (inaudible), but we'll continue to explore that.

We'll continue to be mindful of our pension obligations as well and I gave an update on that as well.

Those issues we hope to take care of themselves through interest rates.

That doesn't appear to be happening, at least in the short term.

We feel reasonably good about where we are from a dividend point of view, in the amount of cash that we generate annually being paid out in the form of dividends.

We'll continue to watch it, but right now we feel like the balance sheet is a good place and it gives us lots of flexibility to be able to invest where we need to, but that will change over time.

Obviously pension obligations, we hope will settle themselves and that might free up some of our thinking there, but for right now, we feel pretty good where we sit from the balance sheet point of view.

Thank you.

Your next question is from Alexia Quadrani from JPMorgan.

Thank you.

If I could just dig in a little bit further on the advertising trends, I know it's always very volatile and we shouldn't maybe read too much into it, but it does look like trends have been better both in print and in digital in the recent quarters.

I guess are there any changes that you're seeing ahead?

I mean, could we be bumping up close to the bottom maybe on the print side?

And on the digital side, I know you had a lot of internal changes, which clearly are having some positive results there.

Can those be -- can we see incremental growth, I guess, still coming from those changes ahead on the digital side?

Yes, I think -- good morning, Alexia.

I think a lot of what we think is embedded, at least for the next quarter, in the guidance that Jim shared.

I'll say two things.

One is I think we all think that the kind of character of the ad business is fundamentally changing.

It used to be a business that was highly, highly dependent on display.

And that's changing.

And that's making for what feels like more volatility or less certainty from month to month.

The business now is much more about branded content and content services and mobile and video and what I just referred to as kind of advanced story telling.

As a result, I think that means bigger, more complex partnerships with marketers that often kind of take a while to get up and off the ground.

So all a way of saying we have a fair amount of optimism about our continued growth in the areas that we've been saying have been growing, which are video, branded content, mobile, and the services around branded content.

And if I can just say in particular, one of the things I'm excited about is the work we're doing in mobile.

I think the way we're deploying our journalism on Smartphone, the stronger visual impact of what we're doing, the launch of new ad units in mobile, some of the numbers we're seeing around engagement on mobile, and the straightforward dramatic growth of mobile as a percentage of our digital advertising all feels very encouraging.

That business of can you begin to really drive revenue from mobile alongside the levels of consumption for mobile, I think we made -- I would say dramatic gains across 2015.

We look set fair for 2016 in mobile as well.

Okay.

Thank you.

One quick follow-up, if I may.

I apologize if I missed this.

But the impressive growth in the digital paid subs we saw in the quarter, was there anything unique in the composition of those new subscribers in terms of what type of subscribers they were?

I think we're continuing to see success where you've heard us talk about it all year, so education, individual subscriptions, international, international is actually growing at a pretty fast clip.

And also B2B.

So both education, B2B, and corporate subscriptions.

We're seeing growth in all of those areas and we expect those to be the areas of growth for next year.

I'll also say I think we're retaining better.

So some of the new tactics we've deployed around retention are really starting to take root and you'll see that play out across the next few quarters.

Thank you very much.

Your next question is from Craig Huber from Huber Research Partners.

Yes, hi.

Thank you.

Got a few housekeeping questions first, if I could.

Pension, what is your outlook here for potential contributions to the pension this new year?

Craig, we are well ahead of required funding, government-mandated funding for many years -- or many years, I should say several years.

I think we still hold that interest rates -- we'll hold out to see where interest rates go over time.

We don't see any real immediate need to be more aggressive on fundamentals.

There are some small contributions that are a result of some contractual obligations.

Those are relatively small, and so our outlook for the year should be relatively small, but no discretionary contributions.

That's our current posture.

Okay.

And also wanted to ask you for a daily and Sunday circulation print volume, what are those percent changes in the quarter year over year, please?

Q4 daily, down 6.9%.

And Sunday, 4.4%.

Okay.

Thank you for that.

Then also, newsprint, curious what the average percent change there was for price and also consumption, please, in the quarter?

The total raw material number, I think, in Q4 was down about $4 million.

I think three-quarters of that was price and one-quarter was volume-related.

I will say that newsprint price has been declining really all throughout 2015.

We think that bottom has been hit and there are some early signs of prices potentially rising next year.

There's been some small announced price increases.

We'll see where that goes.

But I think the idea that prices might continue to climb, we don't think is likely to happen.

Also just want to finish up here with a couple questions on costs.

In the fourth quarter, it seemed like your costs were meaningfully better than you guys were looking for.

Wonder what that change was as the quarter played out?

And also, for this new year, I make it cost adjustment up, I guess, low to mid single digits.

If you take out the digital investments there, what would that be, please?

Well, we haven't given -- we're not going to get to that level of granularity.

The one thing I would say is we continue to both in all throughout 2015 and into 2016 we continue to take out cost [in] the legacy business, that will continue.

I said, I mentioned that newsprint price alone was a pretty big help in 2015.

It will be a help in 2016, because in the early part of the year, we'll still be comping against some lower prices, but prices that are likely to be higher as we get to the back half of the year.

So I'm not going to break that out, but I will say there was a similar trend that occurred this year, too, which is pretty strong control on the legacy side, pretty good investment on the advertising, technology, marketing side.

We think those likely continue, but I don't want to be more precise than that.

Only thing we might add is 2016 sees a couple of exceptional news events, the Olympic games, the Presidential election, which have got, as we're one off one, costs that recur once every four years, but not every year.

Great.

Thank you.

Your next question is from John Janedis from Jefferies.

Thank you.

Good morning.

Maybe this one's for Meredith or Mark.

But you've highlighted timing in comps and the digital advertising segment and expanded the offerings to advertisers.

I was wondering, given the reported mobile growth from the larger pure-play companies, there is that narrative that budgets are further shifting from print to mobile.

I was hoping you could comment on that, given your unique position as a national leader in print, and then also with a large digital and growing mobile business.

Hi, there.

I will say, I think Mark talked about the level to which mobile grew as a percentage of advertising.

So I think in the fourth quarter it was 22% of our advertising.

Most of that growth is on the Smartphone specifically.

So we're very optimistic about that continuing.

What I'll say is we're learning quite a bit from what's going well in mobile on the direct sales side with our Mobile Moments product and our Flex Frame ad product.

And we're going to translate a fair amount of that back into web display.

So I think we have some -- while that business is sort of broadly softening, I think we have some optimism around the future there.

We treat it more like mobile.

And I think Jim talked about print and our thoughts on print are already embedded in the guidance.

But there are plenty of categories that remain quite strong in print; luxury being the biggest one for us.

And we still have a fair amount of optimism there.

And some of the transition is from desktop digital to mobile rather than from print to mobile.

Yes.

That's the other thing.

So you mean the majority then comes from display?

Say that again?

I'm sorry.

Do you think the majority then of that growth is coming -- meaning a shift from display or I'm trying to figure out, where is that budget coming from?

Desktop display to Smartphone versus print to Smartphone.

Okay.

Thank you.

And then maybe, Jim, just a quick follow-up in terms of that investment in digital.

I don't know if you want to give the exact number, but is it fair to say backing in the numbers from Q1 that you're looking maybe at low to maybe mid tens of millions investment this year?

Well, low to mid single digit on our base, which puts you in that -- that's as good as numbers I can give off a base of whatever numbers, [3.3].

That's the guidance we're giving.

It's a reasonable range.

I think we're going to have to be adaptable as we go and we will.

We'll leave ourselves room to experiment and to test a few things.

So I don't want to be as precise as the numbers I've given already.

I think that's -- I want to say our posture on investment is to experiment and back success and feed money in as we see success.

So I believe we should remain fairly flexible about the volume of investment through the year.

Thank you very much.

Your next question is from Doug Arthur from Huber Research Partners.

Yes, two questions.

Meredith, you broke out mobile as 22% of digital.

Can you update us on video as a percent of total?

I think in the third quarter, you said less than 10% and native.

Then the second question to Mark; I mean, Mark, obviously we've talked a lot here on this call about costs and digital investment.

You sort of implied in your remarks that this 2016 is a transition year, it's an investment year, and that you would resume operating profit growth once the investment's done.

Then you also talked about structural cost cuts in the legacy business.

I'm wondering if you could just clarify your outlook on operating profit growth, generally speaking, for 2016?

Thanks.

Do you want me to go first?

Hi, there.

So video is still a fairly small percentage of our overall business, which I think we've said.

Small, but growing.

So video and VR were strong for us in the fourth quarter again on a small base, but we do expect that to grow.

Branded content is becoming, and was in the fourth quarter, a much more meaningful percentage of the business.

And I'll say a fair amount of that was also video-driven, so branded content programs that had video production as a meaningful part of what we were doing.

Okay.

And if I can -- I mean, as I said in my remarks, Doug, we're committed to growing profitability over time.

2016, I think you correctly identified as a transitional year, and as Jim said, we see operating costs going up somewhat, principally because of investment.

But we're committed to margin protection and growing profitability over time.

Over 2016, we're going to look hard at the cost base.

We've had success in recent years and indeed in the quarter we're talking about, Q4 2015, in containing our costs.

We believe there is scope for structural reduction in our cost base.

We're going to explore that, plan that out, and then implement it.

And I'm not going to give you a precise timing on the transition, but my expectation is certainly as we go into 2017 that we will be looking to move to growth in EBITDA and growing profitability once again.

There are no further questions at this time.

I will turn the call back over to Harlan Toplitzky for closing comments.

Thank you for joining us this morning.

We look forward to talking to you again next quarter.

This concludes today's conference call.

You may now disconnect.