New York Times Co (NYT) 2016 Q4 法說會逐字稿

Good morning and welcome to the New York Times fourth-quarter and full year 2016 earnings conference call all participants will be in a listen only mode.

(Operator Instructions)

I would now like to turn the conference over to Harlan Toplitzky, Executive Director of Investor Relations and Financial Planning and Analysis please go ahead.

Thank you and welcome to the New York Times Company's fourth quarter 2016 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 Levein, 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 2015 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, Ill turn the call over to Mark Thompson.

Thank you, Harlan, and good morning everyone.

The fourth quarter of 2016 saw unprecedented growth in digital subscriptions, double-digit year-over-year growth in digital advertising, encouraging results in our print consumer business, but continued stiff headwinds in print advertising Those headwinds, combined with investments in the growth areas in our business, led to operating profit being down both for the quarter and the full year.

Nonetheless we see both Q4 and 2016 is a whole as a strong vindication of our strategic direction.

We are a smart phone first, subscription first global news provider, committed to delivering journalism worth paying for and innovative premium advertising experiences equally worth paying for.

In a world full of fake news and low quality commodity digital ads it's a distinctive vision and one which audiences and advertises around the world responded to in 2016.

Let me turn first to our subscription businesses.

President Trump was once again busy tweeting this weekend that our audiences and our subscribers were, to use his word, dwindling.

Well not so much, Mr. President.

We had spectacular audiences in the quarter with 220 million users coming to us in November for example.

As for subscribers, in Q4 we added 276,000 net new digital subscriptions to our news product.

For comparison that is more new net new subscribers in one quarter then we added in the whole of 2013 and 2014 combined.

In 2016 as a whole we added 514,000 net subscriptions to the digital news product.

Perhaps the new president was referring to the new year and guessing that there had been a post-election lull.

If so, wrong again, as you'll hear from Jim in a few minutes we're continuing to see remarkably strong numbers of new subscribers.

And remember that our digital subscription model was already accelerating even before the present intense news environment took hold.

Six years in, our pay model remains buoyant and the pool of near at hand already engaged potential subscribers looks not smaller, but bigger than it did a year or two ago.

Print circulation also benefited in Q4 with the best quarter over quarter net growth in home delivery subscriptions in over eight years.

All of this means that at the end of 2016 if you add up print, digital news and digital crossword subscriptions we have a total of 2.9 million paid subscriptions.

Indeed I can announce as of today February 2, 2017 we have exceeded 3 million total paid subscriptions; a landmark in the history of the New York Times company.

At the very peak of the Times print only history in 1993 we had 1.8 million subscriptions, so this is an important moment for us.

But I also want to say that we've only just begun.

I believe there is immense further potential for growth in subscriber numbers and revenue.

What makes our subscription first growth strategy possible is the quality of the work in our newsroom and editorial departments.

Under Dean Baquet's and James Bennet's leadership, Times journalism is in amazing form and audiences have been flocking toward authoritative coverage of and commentary about a momentous period in the politics of American and the world.

We are committed to covering this period and the new administration fairly but also rigorously and with neither fear nor favor.

Indeed we have allocated an additional $5 million to the newsroom's budget this year to pay for more journalism and especially more investigative journalism in Washington DC.

Dean and the newsroom published their own road map of the future a couple of weeks ago and I'd encourage anyone who is interested in the future of quality journalism at the Times and elsewhere to read it.

As we look for ways to reach new subscribers and extend the powerful New York Times brand we continue to innovate in the delivery of our journalism.

Just this week we launched a new podcast, The Daily, which is already the most popular podcast in iTunes store.

And this morning we announced an exciting new venture with Snapchat that will see us deliver a special version of our morning briefing to that very distinct and highly engaged audience.

Digital subscription revenue growth 22% year over year in the quarter and print consumer revenue was flat.

Digital advertising revenue also grew 11% year over year.

The increase was driven largely by further gains in smartphone, branded content, marketing services, and programmatic.

The second half of 2016 was an important turning point for us as we saw the growth in these businesses more than make up for declines in our web homepage and direct sale banner businesses.

Print advertising however remains tough for us as it has for the rest of the industry.

In Q4 the year-over-year drop was 20%, while it was 16% for the full-year.

As I've noted in previous quarters, print advertising is a far smaller proportion of our total revenue than it once was.

Nonetheless it was enough when taken with cost increases largely associated with our investments in future growth to impact both topline revenue and profitability.

Total revenues for the quarter fell 1% to $440 million.

Adjusted operating profit fell 19% in Q4 to $96 million.

Now Jim will give you guidance on how we see the present quarter shaping up but I wanted to say a few words about investment and costs.

We do believe that we been presented with a unique opportunity to introduce and engage new audiences with Times journalism.

And we plan to invest more in the early part of 2017 on marketing, including a campaign which we will launch in a few weeks time.

As you know we plan to use our accommodation in our New York offices far more efficiently.

That, too, will mean expense in 2017 but we expect it will lead to increased rental income beginning in 2018.

And we will continue to invest in visual journalism, in our new digital advertising businesses, in our global expansion and in other growth initiatives.

These initiatives are reflective of our continued commitment to aggressively manage the business while investing in our digital future.

2016 was a milestone year for the New York Times Company.

We expanded our global footprint, saw record numbers of readers, and accelerated our digital transformation.

Most importantly we saw spectacular rate of growth in our consumer business.

We're confident that we can sustain or even accelerate that rate of growth.

We are united company, we have a sense of mission which extends to every department.

We know this truth is hard to find and we are all determined to provide reliable, honest information and objective and insightful analysis and opinion to readers everywhere.

And we believe the audience demand is there to make it a great business.

So now with more detail on the financial picture, here is Jim.

Thank you, Mark, and good morning everyone.

As Mark said, the fourth quarter results reflect solid consumer and digital advertising growth with a very challenging print advertising environment.

Adjusted diluted earnings per share was $0.30 in the fourth quarter compared with $0.37 in the prior year.

Reported GAAP operating profit of approximately $56 million compared to an operating profit of $88 million in the same period of 2015.

Overall, revenues are down 1% over the quarter with weakness in print advertising offsetting growth in both digital consumer and advertising revenues.

Total circulation revenues increased 5% in the quarter with digital-only subscription revenue growing strongly, up 22% to $64 million.

On the print circulation side, revenues were slightly lower largely due to declines in single copy revenues.

Home delivery revenues were flat in the quarter compared to the prior year as home delivery price increase in early 2016 more than offset volume declines.

Although we saw sequential improvement in the print subscriptions in the fourth quarter as Mark noted in his remarks, total daily circulation declined 4.3% in the quarter compared to the prior year, while Sunday circulation declined 3.5%.

We experienced a decline in ARPU in the quarter from our digital subscriptions due in large part to the sharp net increase in subscriptions, most of which start a promotional discount.

The large growth in net digital subscriptions also impact ARPU as we receive only a partial quarter of revenue.

We're still experiencing a heightened growth rate relative to the month preceding the election and therefore we expect ARPU to continue to decline before stabilizing when these new subscriptions revert to full price.

We saw strong growth in digital advertising for the second consecutive quarter, mobile revenues continue to grow at a rapid rate versus 2015 and represented approximately 29% of total digital advertising revenues in the quarter.

As creative revenues, a component of advertising revenue, have been rising rapidly the cost to support those revenues have also increased in the quarter.

Lower print advertising revenue was mainly due to declines in luxury and retail categories, however most major categories also experienced declines and we expect this current environment to continue into 2017.

On a monthly basis overall advertising revenues were down 8% in October, 7% in November and 15% in December.

Early in the quarter we acquired The Wirecutter and The Sweethome home recommendation websites that serves as a guide to technology gear, home products and other consumer goods.

The affiliate revenue we earn from readers who purchase products recommended on these sites is recorded in other revenue line in our financial statements.

In the fourth quarter other revenues grew 16% versus the same quarter in 2015 to $29 million, largely due to this acquisition.

GAAP operating costs increased 3% in the quarter while adjusted operating costs increased 5%.

As Mark said will continue to keep a sharp focus on our cost base while investing where necessary to support growth.

To that end our print production and distribution costs were lower in the quarter, while costs grew in marketing to drive consumer acquisition, advertising, technology and the newsroom as a result of the election.

Nonoperating retirement costs were down in the quarter to $2.5 million from $7.5 million in the prior year.

And in the quarter we recorded three special items which have been excluded from our pro forma results.

In Q3 of 2016 the company offered participants in various defined benefit plans the option to immediately receive a lump sum payment or to immediately begin receiving reduced monthly annuities.

In the fourth quarter the pension funds distributed over $50 million on that offer and settled retirement obligations of over $53 million, resulting in a $21 million charge.

Effectiveness was to continue to reduce the size overall size of risk of our plans as well as to improve the funded status.

The second item relates to a $4 million gain we recorded related to the sale of some assets of Madison Paper Industries, a paper mill in which the company has a 40% interest and which ceased operations in the second half of 2016.

We also recorded $4 million income tax benefit related to reduction in the companies reserve [for certain] tax positions.

Moving to the balance sheet, in December we used approximately $189 million in cash to retire a debt at maturity.

As a result of that principal repayment, our cash and marketable securities balance declined in the quarter and we ended the quarter at $738 million with total debt and [co-lease] obligations principally related to the sale-leaseback of our headquarters building, of approximately $247 million.

The funded status of our qualified pension plans improved in the year due to strong asset performance and improved mortality tables, partially offset by lower discount rate.

And also actions taken to reduce the size of the plans.

The underfunded balance of a qualified pension plans at the end of the year was approximately $223 million, an improvement of approximately $50 million from last year.

In December we announced our plans to consolidate the company's operations within our New York City headquarters from 17 floors we currently occupy to 9 by the end of 2017.

As Mark mentioned, we believe this will enhance our ability to work together while also allowing us to monetize 8 floors, which total approximately 250,000 square feet in addition to the 7 floors leased to third parties today.

This effort is scheduled to take the entire year to complete and will require the temporary relocation of a number of employees to office space elsewhere in midtown Manhattan.

We expect to incur approximately $50 million in capital expenditures in 2017 to reconfigure the space, as well as $5 million to $10 million in operating costs, largely in rent for temporary office and moving costs.

We will begin marketing the eighth floor shortly and expect to begin recording rental income in 2018.

We will also incur up front cash payments for lease commissions and other lease related items upon execution of leases which are not quantifiable at this time.

Ultimately we believe this project will further enhance the value our headquarters building.

Under our sale-leaseback agreement we have the option to repurchase our leased space for $250 million in 2019 which we currently expect to exercise.

These actions will not restrict us in any way under this agreement.

Let me conclude with our outlook for the first quarter of 2017.

Circulation revenues are expected to increase approximately 6% compared to the first quarter of 2016, driven by continued benefit from our digital subscription revenue growth.

We expect digital-only revenue to grow at approximately 25%.

For the first quarter 2017 we continue to experience strong growth in net new subscribers.

We currently expect more than 200,000 net additional subscriptions to our digital news products and approximately 15,000 net additional subscribers to our digital crossword product.

Over the past several quarters we've experienced rapid growth in the number of subscriptions to our digital news products, far beyond the guidance I provided on prior quarters earnings calls.

In this environment, this metric has become increasingly difficult to predict and beginning next quarter's earnings call we will discontinue the practice of providing forward guidance on the number of additional subscribers we expect.

However we will continue to report the actual number of both news and Crossword product subscriptions additions each quarter.

Overall advertising revenues are currently expected to decrease in the high single digits with growth in digital advertising between 10% and 15%.

Other revenues are expected to increase in the high teens largely from the impact of The Wirecutter business we acquired early in the fourth quarter.

We expect additional cost related to an elevated level of marketing and advertising spend to support digital growth, as well as the additional costs associated with our acquired [bit] companies and costs associated with our real estate project.

As such, operating costs and adjusted operating costs are expected to increase in the mid to high single digits in the first quarter.

Nonoperating retirement costs are expected to be $4 million in the first quarter, while for the full year interest expense is expected to be $20 million to $25 million and depreciation and amortization is expected to be between $60 million and $65 million.

As I stated earlier in my remarks we expect capital expenditures for our real estate project to approximate $50 million and total capital expenditures to be between $85 million and $90 million for the year.

Finally, I want to note that our 2017 fiscal calendar includes a 53rd week, which will occur in the fourth quarter.

With that, we would be happy to open up for questions.

(Operator Instructions)

Our first question comes from Alexia Quadrani with JPMorgan.

Please go ahead.

Thank you just a couple of questions, I think you gave some color on the RPU on additional only-subs but do you have a number in terms of guest revenue per subscriber is right now and then I have a follow-up.

I think we probably gave quite a bit of numbers you can probably get pretty close to that number I think the RPU is probably in the $13 or $14 range currently, as a point to my comment was largely that in the world where we're adding so many subscribers in a quarter and those are on introductory offers that puts pressure on RPU, but --

Good morning Alexia, Mark here.

The point being there are lots of these, the surge in the subscriptions happened after the election by roughly from halfway through the quarter so you got people coming on to and becoming subscribers halfway through the quarter many of them on additional discount.

That has a transitionary affect on RPU we expect as Jim said once they go to full price, we'd expect some correction in RPU though as Jim also said were continuing to see astonishingly large numbers of new subscribers and some of this affect will also be in (inaudible) Q1 and possibly in future quarters.

To be clear that discounting strategy for new subscribers is consistent with what we always see?

We have not changed the terms in which subscribers join us as a result of the surge; it is exactly the same as it was before.

I guess Mark following up on the really rapid growth you're seeing right now in subscribers clearly it seems that President Trump, much to his chagrin might actually be adding to [bands] with the news media in general.

I know you said both circulation both digital and print have done better since the election, or at least recently.

Do you think there is a real correlation between all of this chaos and noise coming out that it is driving a lot more demand for news media and this could be a sustainable trend at least in the intermediate term?

Alexia if we restrict ourselves to empirical evidence I would say we're still learning by talking to subscribers and through qualitative research exactly what is going on.

I would say we're definitely seeing a significant uptick in people expressing willingness to play therefore the conversion coefficient as it were.

Though we think there are multiple factors going on.

I think the broader point is we're entering -- I mean one might expect after a US presidential election a slight period of quieter transition followed by a honeymoon period that is manifestly is not the case we're in a very lively news environment with a very activist news making new administration.

And I think the issue of how long will this heightened interest last probably is the same as how long will the administration continue to be creating news and controversy.

As a former journalist my judgment would be there is plenty of kinetic energy in the news cycle and that's likely to continue many months or possibly years.

Yes to put a fine point on it the heightened interest seems to be in independent original reporting and other aspects of journalism.

We think that's going to go on for some time.

Alexia it's also worth saying that we are seeing a surge not just in terms in this country but the whole world is watching what is happening in America, the American digital story is part of a broader populace wave that is sweeping the whole Western world we are also seeing real spikes in international interest and indeed international subscriptions.

That to me seems very logical that would happen.

Then housekeeping, Jim you mentioned the monthly numbers for the quarter in terms of the add revenue; did you give any color on what you saw in January?

We're off to a pretty good start in January in digital and I think broadly Jim gave guidance, but you can expect to see digital continuing to be strong and I expect print to be pretty similar.

I would say in the high single digit [decline] advertising I also suggested that advertising in the quarter would be up; digital advertising 10% or 15% that would suggest we are still going to be in a pretty tough print environment in the first quarter absolute precision around that is hard we're not expecting that to change dramatically in the first quarter.

So maybe modest improvement overall but not much beyond that.

Modest improvement overall driven by somewhat improved digital results.

Okay thank you very much.

The next question comes from Doug Arthur with Huber Research

Thanks, question for Meredith on the digital advertising.

The percentage growth by quarter has wobbled all over the place, its been good, bad and indifferent.

(laughter) If you look at the dollar growth was $15 million in 2015 and about $12 million in 2016.

I guess you got an easy comp in the first quarter; how do you juice the dollar growth in digital, you talked about mobile, obviously native is strong.

I'm wondering if you can dig into the components and how you see the dollar growth going overall.

Thanks.

Sure I will just say, look I think we saw -- we had a difficult first half of the year in digital advertising and a pretty good second half of the year in digital advertising; not totally choppy in terms of results and we called early in the year that we would see a lot of the business weighted to the back half in digital.

I think what we're seeing now is a real pivot in the business, the growth businesses now which are branded content and smartphone and programmatic video in marketing services now together are meaningful larger than the legacy businesses, larger than the homepage and the direct-sold banner business.

We expect that to continue; I think we are also just getting better at selling those new businesses and we have a better sense of our ability to sell them across the year.

We talked a lot last year about the lumpiness of the business in fact we expected to see a comeback in the second half; I think those are becoming part of the regular business now we have a bit more visibility into them.

Okay thank you.

The next question comes from Kannan Venkateshwar with Barclays.

Please go ahead.

Thank you.

Jim one on that cost side; we've seen of course some investment last year with the new guidance, it looks like costs will remain elevated in the first quarter.

When did the investment cycle run with some of the cost growth on account of variables like marketing; is it something that you expect to remain elevated given the subscriber growth?

Some color on that would be great thanks?

The answer is -- let me talk broadly about what we think drives the first quarter in big large buckets.

We are going to be spending more against marketing; both on the direct-to-consumer side and on some campaign sides.

We will see that more pronounced in the first half, but to the extent that we are successful in our marketing efforts we will continue to do that and find ways to put money against that.

That is something that is hard to predict but there's no doubt that marketing spend in a business that we feel very good about is likely to continue to be elevated and we will find ways to money against that them pullback but we don't think works; that is one of the components of the first quarter.

Acquisitions in the first quarter will reflect now three acquisitions that were done -- where largely none of those existed last year you will see some of the costs, so in that way those costs [of costs] continue.

The we have some other costs which are referred to; we will have some more dollars around the real estate project.

I do think the way this plays out in the years, we will see some more elevated cost year over year higher in the first half, second half that will moderate for a whole host of reasons.

There's some other one-time events the first quarter that we don't think will repeat.

I think we will be more elevated the first half then in the second but on the marketing side particularly we will have to be somewhat adaptable to opportunities as they arise.

To reinforce that Kannan and I said in my remarks we put on more new digital subscribers to our news product in Q4 in a single quarter much of that happening in the second half of the quarter than we did in the whole of two years in 2013 and 2014.

We are going to be prudent about this, we are seeing spectacular numbers right now in Q1 of this year.

If we think there is an opportunity to reinforce and to use this moment to reach out and really scale our digital subscription business we're going to spend the money.

Obviously figuring out what works and learning from what works about how to scale the investment.

So just as a follow-up there's obviously been some restructuring in terms of number of people and so on over the last year.

Some of those benefits should start coming in over the course of 2017; is it fair to say the organic number one to exclude the benefit of some of these restructuring is actually higher?

More in the high single digits, or double digits?

In terms of cost growth?

I'm not sure I completely follow that but I would say the things I isolated in Q1 when you pull it out suggests that the cost is relatively flat but there is number of initiatives inside the Company that we talked about that will play out over the year that will be attacking our core cost.

The way I'd put this Kannan is we are progressively working on the legacy cost base of the Company which we expect to decline over time.

The issue for me now is about the level of investment in building the digital business; obviously the overall cost numbers you see are a blend of the two.

Great thank you.

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

Please go ahead.

Good morning, just a few questions please.

A couple of housekeeping questions, Jim your tax rate is adjusted for the various one time items over the last two years was roughly 36%, 37%.

Assuming the federal government doesn't change the tax rates would do you think it will be in 2017?

Ex any adjustments to reserves that could pull in and out and it does create a lot of noise, we regularly say we think our tax rate on every additional dollar we earn is earned at about a 40% tax rate.

So that's a pretty good solid number there.

That's come down over the last couple of years; there's been some benefit in state tax rates but I think 40% is a good number long term, actually slightly beyond that topic I think any sort of adjustments to corporate tax rates will be of significant benefit to us as we are a high taxpayer.

And then on the cost side it sounds like you said if you strip out the acquisitions in the marketing costs and these headquarters-related costs to free up some space to rent out; that should take a while (inaudible) roughly flat underlying in the first quarter.

If I heard you correctly, are you signaling that for the full year as well?

I'd like to not go too deep other than all reaffirm what I've said.

Let me say one other thing there will be elevated marketing spent in the first quarter both direct to consumer and otherwise; that is part of that mix.

As I said I think in the back half of the year goes we will see -- the first half of last year we saw more flat costs in the back half of the year including the fourth quarter we saw elevated cost in part due to acquisitions as we comp to the back half of the year I think our cost growth will be meaningfully below the first half of the year.

But with the opportunity that to the extent that we see opportunities to invest we will do that and we will aggressively do that.

But that is the way that I think that are year plays out without be more precise than that.

Back to the subject of the discounts that are offered on the digital subs [here].

(Inaudible) new subscribers here, my sense is over the many years that you've offered the marketplace for $0.99 per week for the first four weeks then it reverts to the full price, but last year seeing this out in the marketplace it looks like you had some offers out there where new subs could get the digital product for half price for the first 52 weeks and then it goes to the full price.

My sense is that it's different than in prior years; I don't see that in the marketplace right now or on the website is that offer still out there is my main question?

We're always testing different kinds of offers but in general the second offer you described the notion of half off for a period of time sometimes one year is a pretty standard offer in the market.

When Mark answered the question about where RPU was based on the sharp increase in subs in the Q4 particularly at the end of Q4 that is what he was referring to; those offers tend to retain very well.

As well.

And that's an offer, referring back to earlier remark predates the Q4 surge and although we reserve the right to adjust offers one of the reasons that we introduced that offer, tested it, and then rolled it out is because as Meredith said it's turned out to be highly effective at converting new subscribers into long-term subscribers.

It gives them a longer period of time to habituate and get used to and to value the Times.

So you are saying that is one of the big reasons why the RPU is down so significantly?

We're saying that because lots of new subscribers arrived through the course of Q4 on that offer and they were counted in the subscriber counts for the quarter quite rightly but we only had a part quarter of subscribers paying half the regular amount.

The sheer number 276 subscribers arriving mostly only for a few weeks and at half price so that given just the math that we would expect a large number of those subscribers to retain over and to get to full price and to continue to be subscribers paying at the full price.

Right and I'll add to that, we are also getting a lot better at retaining them; we're getting better at how we on-board and keep them engaged with different parts of the offering.

My last question I appreciate that on the print circulation side what did you guys do for pricing; you generally raise the prices in general, what happened this year throughout the US?

We continue to raise prices in the range of what we've done in the past with slight variations; generally in the range we're feeling pretty good about --

Early indications are encouraging.

It is early days; we've been encouraged so far by retention results notwithstanding the price [raises].

So should you be up about 5% you're saying?

In the neighborhood yes.

Thank you.

This concludes our question-and-answer session.

I would like to turn the conference back over to Harlan Toplitzky for any closing remarks.

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

Thanks everyone.

The conference has now concluded; thank you for attending today's presentation.

You may now disconnect.