New York Times Co (NYT) 2017 Q2 法說會逐字稿

Good morning, and welcome to The New York Times Company Second Quarter 2017 Earnings Conference Call.

(Operator Instructions) Please note, this event is being recorded.

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

Please go ahead.

Thank you, and welcome to The New York Times Company's Second Quarter 2017 Earnings Conference Call.

On the call today, we have Mark Thompson, President and Chief Executive Officer; Jim Follo, Executive Vice President and Chief Financial Officer; and Meredith Kopit Levien, Executive Vice President and Chief Operating Officer.

Before we begin, I would like to remind you that management will make forward-looking statements during the course of this call, and our actual results could differ materially.

Some of the risks and uncertainties that could impact our business are included in our 2016 10-K.

In addition, our presentation will include non-GAAP financial measures, and we have provided reconciliations to the most comparable GAAP measures in our earnings press release, which is available on our website at investors.nytco.com.

With that, I will turn the call over to Mark Thompson.

Thanks, Harlan, and good morning, everyone.

While we've had another strong quarter, we grew revenue and operating profit year-over-year, and we passed 2 million paid digital-only new subscribers, a first for any news organization.

But we're still determined to move faster in our digital transformation, and as you'll hear, we're making significant changes throughout the company to make that happen.

This was also a quarter of spectacular journalism from our newsroom and editorial department.

You could see that both in areas of classic New York Times strength, breaking story after story, especially in our coverage of the Trump White House and domestic politics; and in exciting new ventures like our podcasts to Daily, which has grown from a standing start in Q1, to become one of the most highly regarded and most popular podcast in the world.

Indeed, just this week, The New York Times was nominated in no less than 8 news and documentary Emmy awards.

We believe that the demand for quality in-depth journalism is growing, not only in the U.S., but across the globe.

We can see that in the response of users to Times journalism and in the growth of our digital audience, and we believe that more and more people are prepared to pay for access to this kind of journalism.

That's the foundation of our strategy.

So let's look now at some of the detail, beginning with our digital subscription business.

As we indicated in our last earnings call, we've seen a moderation in the rate of new subscription additions since the 2 previous exceptional quarters, but we still added 93,000 net new subscribers to our digital news product, a 69% increase in the number of subscription additions compared with the same quarter last year and enough to take us over the 2 million mark.

We reached that second million in less than half the time it took to get to the first million.

Now we also added 21,000 net new digital Crossword subscriptions, an increase of 31% over this quarter last year.

This means that together with our home delivery print subscriptions, we now have 3.3 million total subscriptions, an increase of 37% since the same quarter last year.

In July, we also transitioned our popular cooking offering to a paid product, with a goal of converting a percentage of its 10 million monthly unique users into paying subscribers.

We expect to use both our cooking and Crossword products, not just the standalone paid offerings, but also the added features to encourage some subscribers to opt for higher-priced subscription offers.

Revenue from the company's digital-only subscriptions, which includes new product and Crossword product subscriptions, increased 46% compared with the second quarter's 2016 to nearly $83 million.

Overall subscription revenue, that includes digital subscriptions, print home delivery and print single copy sales, rose 14% to $250 million.

Turning to advertising.

Our total advertising revenue grew for the first time since the third quarter of 2014.

Q2 2017 marked our fourth consecutive quarter of double-digit revenue growth for digital advertising.

In this case, it was up 23% year-over-year.

At 11%, the rate of print advertising decline was lower than we've seen in the previous 2 quarters that we regard as more as a reflection of the monthly volatility in this revenue stream rather than a significant turn in the market.

Total advertising revenues were $132 million, slightly up from the previous year.

Revenue for the company as a whole were $407 million, up 9%.

While our adjusted operating profit of $67 million represents a 23% increase compared with the same quarter last year.

This increase was driven by the growth in digital and print subscription revenue I've just discussed.

It's also worth noting that in the quarter, digital subscription revenue overtook print advertising revenue for the very first time.

Print advertising revenue indeed represented just 19% of the quarter's total revenues.

We continue to implement the strategy outlined in our path forward and our newsroom's 2020 report and are confident that we will achieve our stated target of $800 million of annual digital revenue by 2020.

Our newsroom is undergoing a process to streamline its editing function to match the speed and form of digital journalism while freeing up resources to put more journalistic boots on the ground to deliver more investigations and help us further develop our capabilities in visual journalism.

The process is not an easy one, and we'll see the departure of many valued colleagues.

But I can assure you that we are maintaining, and where possible, increasing our investments in our journalism, hiring significant numbers of journalists with the expertise we need for our digital future.

We expect the total size of our newsroom and editorial departments to remain comparable with today.

And we're also reorganizing our company as a whole to accelerate our transition to digital.

In June, Meredith Kopit Levien was named Chief Operating Officer, and she leads the new operations group, which includes the teams responsible for product, design, audience, brand, consumer revenue and advertising.

We intend to continue to invest in the growth of our digital business.

I expect further investments in both brand and performance marketing in the rest of 2017.

But we're also continuing to bear down on costs and improved efficiencies.

To give one example, we are currently in the process of transforming our user space in our headquarters building here on Eighth avenue, freeing up multiple floors to generate additional rental income, but also to develop a more collaborative and creative work environment.

In closing, I'd like to comment on our remarkable international growth.

In the past year, our digital subscriptions have soared, and The New York Times now has subscribers in 195 countries.

International subscribers make up 14% of our over 2 million paid digital-only news subscriptions and continue to grow the faster rate than our domestic additions.

In fact, international subscriptions grew 80% compared with the same period last year.

But we also believe that we've only just begun to tap the potential for subscribers and advertisers beyond our domestic market.

But let me turn over to Jim now for a more detailed financial review.

Thank you, Mark, and good morning, everyone.

As Mark said, the second quarter reflects continued solid progress in advancing our long-term strategy.

Adjusted diluted earnings per share was $0.18 in the second quarter compared to $0.11 in the prior year.

We reported GAAP operating profit of approximately $28 million compared to an operating profit of $9 million in the same period of 2016.

As Mark mentioned, total subscription revenues increased by 14% in the quarter, with digital-only subscription revenue continuing to grow strongly, up 46% to $83 million.

Revenues from our core news product grew 47% in the quarter, while our Crossword product revenues grew 43%.

On the print subscription side, revenues were nearly 3% higher, as home delivery revenues more than offset a decline in revenue from single copy sales.

The increase in home delivery revenues in the quarter compared with the prior year primarily resulted from a price increase in early 2017, which more than offset volume declines.

Total daily circulation declined 3.8% in the quarter compared with the prior year, while Sunday circulation declined less than 1%.

As was the case last quarter, ARPU continues to decline in the second quarter, largely due to the sharp increase in net subscription additions, most of which start on a promotional discount, relative to the size of our total subscriber base.

As we experienced significant increase in net subscription additions over the past 3 quarters, we expect ARPU to continue to decline before stabilizing when these new subscriptions step up to full price.

Moving along to advertising.

We reported total advertising revenue growth of 1% as digital advertising growth more than offset print advertising decline.

The growth in digital advertising was driven by smartphone, programmatic, and our marketing service businesses.

Lower print advertising was mainly due to declines in the luxury, real estate, technology and telecommunications and travel categories.

On a monthly basis, overall advertising revenue increased 1% in April, 5% in May and declined 4% in June.

Other revenues grew 13% versus the same quarter in 2016 to $25 million, principally driven by affiliate referral revenue from the product review and recommendation websites, the Wirecutter and Sweethome, which we acquired in the fourth quarter of 2016.

The increase was partially offset by lower revenues from our live events business, which held fewer conferences in the quarter compared to the prior year.

GAAP operating profits increased 11% in the quarter, while adjusted operating costs increased 7%.

Our print production and distribution costs were lower in the quarter, while costs grew due to higher compensation, consumer marketing costs and costs related to companies we acquired in 2016.

In the quarter, we recorded 2 charges that have been excluded from our pro forma results.

First, we recorded $19 million severance charge, largely related to our workforce reduction, principally within our newsroom, which is announced earlier in the quarter.

We've also recorded a $2 million charge in noncapitalizable expense for the reconfiguration of our headquarters building to make more space available for rental income.

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We're encouraged by the interest we have seen as we continue to market the space we are making available, and we expect to begin recording rental income in 2018.

Moving to the balance sheet.

Our cash and marketable security balance grew during the quarter and ended the quarter at $807 million, with total debt and capital lease obligations, principally related to our sale-leaseback of our headquarters building of approximately $249 million.

Now let me conclude with our outlook for the third quarter of 2017.

Total subscription revenues are expected to increase at a rate similar to the second quarter of 2017, driven by the continued benefit for our digital subscription revenue growth.

We expect digital-only subscription revenues to grow approximately 40% compared to the third quarter of 2016.

Overall advertising revenues are expected to decrease in the mid- to high single digits, with growth in digital advertising in the low double digits.

Other revenues are expected to increase in the high teens, largely from the impact of the Wirecutter business that we acquired in late 2016.

And we expect operating costs and adjusted operating costs to increase in the mid-single digits, reflecting an elevated level of marketing and advertising spend to support digital revenue growth, higher newsroom costs, reflecting the active news cycle, and additional costs associated with the 3 acquired companies.

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

Thank you.

(Operator Instructions) The first question comes from Alexia Quadrani with JPMorgan.

My question is on the impressive digital sub growth we continue to see.

Is there any color you could give us in terms of the type of subscribers?

Is it demographics or the makeup very similar to previous periods?

Are you sort of entering a new demo maybe you haven't penetrated well before?

And then any color about the churn?

Is it sort of trending same as average?

So maybe I'll talk about the character of the new subscribers.

I mean, clearly, many of these subscribers are already people who are previously significantly engaged in the Times.

But there is, I think, some evidence of younger subscribers and a slightly higher proportion of women subscribers.

And you've heard us say as well that the international subscriptions have been growing at a somewhat faster pace than domestic.

It seemed to me both are growing strongly, but international has been very strong.

And I think one interesting thing is that the news cycle, which obviously has been very sensitive around the President and his administration, has turned out to be a great interest to international subscribers as well as domestically.

But we are broadly encouraged by what we're seeing about churn with this group and more broadly what was in the churn.

Can you deal with that, Meredith?

Sure.

Alexia, the -- on just adding to Mark's demographic point, we have seen particularly just after the election, subscriber -- new subscribers coming in who are a bit more likely to be from the center of the country, which I think is also pretty interesting, and a bit less affluent than we've seen previously.

On retention, I think it's actually a really interesting story.

What we've seen so far is that the cohort of people who came in, in the fourth quarter, in the first quarter, are retaining at least as well and in some cases better than what we've seen from previous cohorts.

And we're looking very closely at their engagement.

We look at frequency or days visited, and we look at how deep they go with content, the different kinds of content they engage with.

And everything we've seen so far is that, in many cases, they're engaging at least as well, if not to better, than we've seen in previous cohorts.

And you -- I think you asked about churn.

We're seeing this cohort of people churn at a lower rate, so based on where they are in tenure versus in the previous year.

So we're quite optimistic.

I mean, obviously, we'll know more once they start lapping 12 months and so forth.

But the signs so far, I think, are definitely encouraging.

Yes.

And I would say, generally, we're spending quite a bit more time and focus on retention.

So 1 year, 1.5 years ago, so long before the election, we got better in terms of making longer introductory offers that retain better because they give people more of a chance to subscribe.

I think we're getting better at onboarding.

We've gotten much better at understanding what we would call at-risk moments and actioning around them.

We have more people who are actually coming to us on pay upfront offers.

So that helps with retention.

And then I can't help but say I think our brand work plays a role here too.

So the truth is hard campaign has been good generally for the Times.

But I think for folks to -- who've chosen to pay us, it's a good remainder of what it takes to deliver high-quality journalism and what their investment is going to.

Just one quick follow-up on the international subscribers, which obviously had very impressive growth and seems like a great opportunity for you guys going forward.

Is the advertising opportunity, though, going to be as favorable?

I just know from the -- your historical sort of IHT, the advertising always lags, which is more difficult to further track down or those local advertisers or those national advertisers?

I think there is absolutely an advertising opportunity.

I mean, we've said for the whole business that the subscription business and the ad business have trade on the same driver of deeply-engaged audiences around quality journalism.

And I think there's no reason to believe that doesn't bear out internationally.

I think the numbers internationally look similar, if not the same, as the domestic numbers from an advertising standpoint.

So the same growth trends.

And what I'll say is, I think, our deployment of our ad strategy over the last 3 years with a focus on programmatic and mobile and marketing and creative services around the branded content, and now even more than that, is working internationally.

So we're quite pleased with what we're seeing there so far.

I mean, it's fair to say, isn't it, Meredith, that some of the very big partnerships we've done, I think, for example, the partnership with Samsung to create the Daily 360, is -- it's a valuable global partnership, and there are brands who are trying to reach the whole world.

And we -- because of the scale of our audience and the kind of people we're reaching around the world, we're quite a valuable partner, and I think we're seeing more and more interests from very big brands who want to do very large ambitious things with us.

I think that's right.

And I think our international business, particularly you mentioned the INYT, has tended to be the luxury-focused.

I think we've got a real opportunity, and we're seeing the fruits of it in transitioning a lot of that business into really interesting digital programs.

But we've also had a strategy broadening beyond luxury outside of the United States, and that's beginning to bear fruit.

The next question is from Craig Huber of Huber Research.

I guess, first, I want to just ask your large severance charge of $19 million, I believe it's the largest you have in almost 3 years here.

What in your mind has changed in what you're seeing in your business to do such a large severance charge hereto?

This is principally associated with the changes I mentioned in my script in our newsroom, which is essentially a changing streamlining, but also in some ways a transformation of the way in which our journalism is edited in our newsroom.

And this is really -- I think if Dean Baquet, our executive editor were here, he would say that this is really about developing a capability around editing, which is completely attuned with the kind of journalism we're trying do now and which is focused on our digital-first, smartphone-first strategy.

And whereas, perhaps sometimes in the past, these changes has been associated with a straightforward kind of downsizing for budget.

This is much more about getting the capabilities we need in our newsroom.

So that's the biggest single thing that's happening.

I see it as part of our investment in accelerating the growth of our digital audience and digital business.

Jim, do you want to add any color to that?

Well said.

No, well said.

Just curious.

So none of it had to do with maybe souring out what's the economy as you look at it?

Or further pressure in print or anything like that?

Nothing like that?

No, Craig.

This has been -- we've actually -- we started talking about this last year.

We put out many quarters, good quarter since then.

So this is not -- this is just something that we're executing on, and Mark described it correctly.

No, I think I want to say we're in the middle of a fairly big -- if -- I just talked about the newsroom, we've still got the rest of the company.

We are in the middle of a significant reorganization.

I mentioned that Meredith is now, I'm very pleased to say, our Chief Operating Officer, and she's bringing a new organization together.

I'm sure we will be looking at whether, in a sense, the shape of the organization, the layers and spans of the control of the organization are right.

And I certainly don't rule out -- I mean, we're constantly looking for ways of trying to deliver superior results but with less costs involved.

I don't -- I certainly don't rule out some classic steps to reduce costs in the company.

We have no immediate plans, but that's not impossible.

The other thing which I mentioned is the work we're doing in using the space we have in this building on Eighth Avenue, 620 Eighth Avenue, using the space more effectively, and that will produce financial benefits.

But in those cases, the benefits will be expressed in the ability to rent out additional floors in the building, but that -- it will have a positive effect on our economics as well.

Yes.

I would say that too was a long time in the making.

I don't think you should read into any of this stuff as anything other than our constant focus on efficiency and reinventing the business.

It's different story behind each one of this.

But as I said earlier, in both cases, this is long-time planning and as part of that evolution of the business.

Yes.

The other thing that we've both given or both mentioned is what we are -- the other big thing buried in our cost is the fact that we've been this year more aggressively investing both in performance marketing, in direct marketing and in -- the first time in many years, in brand marketing.

And that's because we see there's an opportunity to build our digital business more rapidly.

And although that is, no doubt, having an effect at the moment in our cost base, so that you can also see from our revenue numbers that it's delivering results.

My other question, if I could.

What are you budgeting your -- for CapEx this year?

And how much of that is for the headquarter redesign, please, and what should we expect for next year too?

I know it's early, but I just want to ask.

The press release which we gave guidance around capital, we said was $85 million to $90 million.

About $50 million of that will be related to the headquarters.

And will that be all done this year?

Or will some of that spill into next year?

My sense is -- I think, we're broadly on track and on plan.

My sense is we'll have spill -- some spillover to that into next year.

But I think (inaudible)

The next question comes from Doug Arthur of Huber Research.

Three questions.

Jim, just a clarification in terms of looking at the severance charge relative to adjusted production cost versus SG&A.

Is it fair to assume because it was newsroom-focused that most -- if you're going to come out with an adjusted SG&A number, excluding the charge, that most of that would fall into SG&A and not production cost.

Is that the right way to look at it?

All of the severance charge -- we just historically put all our severance charges to the SG&A line as that's been considered nonoperational.

Okay.

And then, Meredith, the digital ad revenue guidance for the second half is pretty impressive considering you had big numbers, big growth numbers last year in the second half.

So is this kind of visibility on projects in the pipeline?

Or is this just sort of ongoing organic growth?

Or a bit of both?

I mean, I think the right answer is probably a bit of both.

We've been at this strategy of pivoting the digital ad business to be a creative launchpad business and marketing services business grounded in mobile products that can be sold programmatically, and I think we've been sort of steadily at that for almost 4 years now.

And I think as time goes on, we're getting a bit more of visibility into it.

We are building bigger partnerships, so we're working with marketers on sort of more lasting partnerships, and that just generally comes with a bit more visibility and I think a bit more stability in the business.

I also think there are 2 other things that are going on, and they go to your -- I think the second point you made about this.

One is there continues to be real interest in the market in brand face environments and environments that are about doing high-quality content and things that have real value to people, and that bodes well for the Times and for our ad business generally.

And two, as we see really nice gains in audience and engagement because of the news cycles and because our journalism, we realize that in advertising as well.

So to some degree, the ad business is a supply-driven business.

And as there is more supply of deeply-engaged audience, there are more -- there is more advertising to sell.

Got it.

And I could do the math myself.

But I would assume based on your overall ad guidance for the third quarter, you're expecting -- and I know third quarter print is seasonally not -- it's not a great quarter seasonally.

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

Yes, I think that's fair.

There's still a lot of volatility in the market.

You just have to look at the Q2 month-by-month print results to see that.

September is a huge month and a very important part for print of Q3, actually for the whole of Q3.

We don't have great visibility into that yet so...

I think that's a very important point that the outturn on the quarter is very hard to predict.

Frankly, even into August, it's quite hard to say what's going to happen in September.

It's also fair to say that, so far, Q3 looks more like Q1 than Q2.

I think it's fair -- it's also fair to say.

And I'll -- look, I'll keep saying what we've said before on print.

It still has a place in a marketers' mix.

And there are certain things like an announcement, an event, the launch of new product where nothing is more effective at conveying importance to an audience or getting attention from an audience.

And we expect that to continue.

So we've seen periods of sharp decline in print before, and then we've seen periods of stabilization.

And a really good example of that is a decision by FOX News.

FOX and friends has got a full-page ad in the physical New York Times today.

So they decided to move upmarket and support our journalism with their money.

So we're very pleased to have them.

And just final question.

I know you're not giving quarterly guide on digital subs news only.

Third quarter last year was obviously the start of a very significant sort of ramp to 3 quarters, so I think it was 120,000 news-only net in the third quarter last year.

Jim, I thought you made some reference to your expectation broadly.

But is there any comment on third quarter trends?

Can I just say you were absolutely right, Doug, on what you said first is we're not giving guidance on numbers.

That's completely correct.

And I think what Jim talked was revenue rather than numbers.

But Jim will talk...

Yes.

The revenue is clearly easier to predict.

It's more of annuity-type business.

We're very confident in guiding our revenues.

We've been widely off in our ability to predict numbers.

We've moved away from that.

It's not going to be a huge -- the volatility of that number will likely not be a huge driver in the quarter.

We're very confident in the revenue number.

But if I can say -- I just want to briefly say what I said last time in the last earnings call about the digital subscription business, which is we were seeing real growth.

If you go back and look at the second quarter results since the mobile launch, back in 2011, you will see long before the presidential cycle and the arrival of Mr. Trump in the White House, you can see acceleration in the model.

And although, as we said in our last earnings call, we've come off the peak if what you can call a Trump bump.

We still believe we can see and indeed can exploit underlying acceleration in the model.

We're not going to give you a detailed guidance on numbers of net digital adds for Q3 because we don't have the visibility ourselves, and we think it's a fool's errand to pretend that we do.

What I can say is we're very confident that we can continue to build this audience and that we're not yet satisfied with the underlying rate in which we're growing the digital business.

We think the potential is so great we should be speeding up, and we are essentially reorganizing the entire company and spending a lot of money on marketing to achieve and to increase that acceleration.

This concludes our question-and-answer session.

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

Thank you for joining us this morning.

We look forward to talking to you again next quarter.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.