The New York Times Company
Q1 2022 Earnings Call Transcript

Published: 4 May 2022

[Operator:]

Good morning, and welcome to The New York Times Company’s First Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Harlan Toplitzky, Vice President of Investor Relations. Please go ahead.

[Harlan Toplitzky:]

Thank you, and welcome to The New York Times Company’s first quarter 2022 earnings conference call. On the call today, we have Meredith Kopit Levien, President and Chief Executive Officer; and Roland Caputo, Executive Vice President and Chief Financial Officer. Before we begin, I would like to remind you that management will make forward-looking statements during the course of this call. These statements are based on our current expectations and assumptions, which may change over time. Other – excuse me, our actual results could differ materially due to a number of risks and uncertainties that are described in the Company’s 2021 10-K and subsequent SEC filings. 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. And finally, please note that a copy of the prepared remarks from this morning’s call will be posted to our investor website shortly after we conclude. With that, I will turn the call over to Meredith Kopit Levien.

[Meredith Kopit Levien:]

Thanks, Harlan, and good morning, everyone. Before I begin, let me take a moment to acknowledge the bravery and dedication of our journalists in Ukraine and the surrounding region. Our reporters, photographers and support team have been on the ground since January, well before the war began, and their courageous work is helping people make sense of this tragic and still-unfolding conflict. This is precisely the kind of story that The Times is uniquely positioned to cover, and our readers have responded in large numbers and with deep engagement. Our ability to lead on, and engage our audience in, the biggest and most consequential stories of our time underpins our confidence in the updated strategy we detailed on our last earnings call. That strategy is to become the essential subscription for every English-speaking person seeking to understand and engage with the world. It’s grounded in three pillars

[Roland Caputo:]

Thank you, Meredith, and good morning. As Meredith said, our first quarter subscription results give us real confidence in our ability to execute and deliver on the strategy we laid out for you on our fourth quarter call in February and we’re excited to be able to share more with you at the company’s Investor Day next month. Turning to the quarter, which is our first, including the financial results to the Athletic. Adjusted diluted earnings per share was $0.19, $0.07 lower than the prior year. Amortization of intangible assets associated with our first quarter acquisition of the Athletic, which was not included in the guidance we gave last quarter, reduced adjusted diluted earnings per share by approximately $0.02. We reported adjusted operating profit of approximately $61 million lower than the same period in 2021 by approximately $7 million. With the acquisition of the Athletic, we have begun reporting our results in two segments, The New York Times Group and The Athletic. Adjusted operating profit in The New York Times Group was approximately $68 million in the quarter, relatively flat when compared to the prior year, while The Athletic lost approximately $7 million. On a consolidated basis, the company added 387,000 net new digital-only subscribers and 382,000 net new digital-only subscriptions in the quarter. The number of digital-only subscribers with news entitlements increased by 312,000 in the quarter. Please note that the net subscription additions in the quarter were reduced by 67,000 as a result of a decision to grant Games access to our home delivery subscribers, who did not already have it as part of their print bundle. Excluding this impact, net subscription additions were 449,000 in the quarter. This had no impact on the number of subscribers. Our acquisition of The Athletic resulted in the addition of approximately 1.1 million subscribers and 1.2 million subscriptions as of the date of the acquisition. Subsequent to the February acquisition, The Athletic added 16,000 net subscribers and 24,000 net subscriptions. Most of these net additions came at the end of the quarter as we began to apply our audience in subscription growth playbook. We look forward to continuing this work in earnest in future quarters. I also want to echo Meredith’s statement that we expect there to be variability in net addition from quarter-to-quarter as a result of seasonal factors and the news cycle. However, we remain confident in our ability to achieve our goal of 15 million subscribers by year end 2027. Total subscription revenues increased more than 13% in the quarter with digital-only subscription revenue growing approximately 26% to approximately $227 million. Digital-only subscription revenue grew as a result of the large number of new subscriptions we have added in the past year, continued strength and retention of the dollar per week promotional subscriptions who have graduated to higher prices and the inclusion of subscription revenue from The Athletic. This quarter’s earnings release includes the disclosure of digital subscriber ARPU, one of several new metrics we plan to disclose each quarter. Please note that the ARPU, we are reporting beginning with Q1 of 2022 represents the average revenue per digital subscriber, and therefore, includes all of our digital products. The ARPU commentary I have made on previous calls referred solely to the digital news products. For the quarter, digital-only subscriber ARPU decreased 1.2% compared to the prior year and 5.3% compared to the prior quarter, both largely driven by our acquisition of The Athletic. Excluding the impact of the acquisition, the year-over-year rate would’ve increased primarily due to new subscriptions graduating from the introductory price to either full price or an intermediate step up price. While the sequential decline would’ve been more moderate as the growth in net subscriber additions in the quarter at introductory promotional pricing, more than offset the gains from subscribers graduating to higher prices. Print subscription revenues declined approximately 3% as overall volume declines in both home delivery and single copy more than offset the benefit from the first quarter home delivery price increase. Total daily circulation declined approximately 9% in the quarter compared with prior year, while Sunday circulation declined 8.2%. Total advertising revenues increased approximately 20% in the quarter with digital advertising growing more than 12%, largely as a result of our proprietary first party targeted advertising products and expanded audio product portfolio, as well as the inclusion of advertising revenue from The Athletic. The digital results were negatively affected by lower spending than we expected in the technology category, as well as advertisers decisions to avoid placement near reporting on the war in Ukraine. Meanwhile, print advertising was higher by approximately 31% compared with 2021, primarily driven by growth in the entertainment and luxury categories. Other revenues increased approximately 5% compared with the prior year, to approximately $49 million, primarily as a result of revenue from higher commercial printing and Wirecutter affiliate referral revenues. Other revenues came in lower than guidance as a result of a delay to a non-recurring licensing project, which we expect will be finalized later in the year. Adjusted operating costs were higher in the quarter by nearly 18% as compared with 2021 in line with the low end of our guidance. Cost of revenue increased approximately 12% as a result of our acquisition of The Athletic, growth in the number of employees who work in The New York Times newsroom and on our Games, Cooking and Wirecutter products, as well as from higher subscriber servicing costs and print production and distribution costs largely as a result of higher raw material costs. Sales and marketing costs increased approximately 29% driven primarily by higher media expenses. Media expenses also increased approximately 29%, largely as a result of higher brand marketing. This represents a significant slowdown in the year-over-year growth rate of media expenses as compared to Q4 of 2021, which is consistent with our expectations to improve the overall efficiency of our marketing spend. Product development costs increased by nearly 22%, largely as a result of growth in the number of digital product development employees in connection with digital subscription strategic initiatives, as well as a result of our acquisition of The Athletic. General and administrative costs increased by approximately 26% largely due to growth in the number of employees as well as a result of our acquisition of The Athletic. Our effective tax rate for the quarter was approximately 19%. As we said previously, we expect our rate to be approximately 27% on every dollar marginal income we record with the possibility of some variability around the quarterly effective rate. Moving to the balance sheet, our cash and marketable securities balance ended the quarter at approximately $475 million, a decrease of approximately $600 million compared with the fourth quarter of 2021, largely as a result of our all cash acquisition of The Athletic in the quarter. The company remains debt free with a $250 million revolving line of credit available. During the quarter, share purchases totaled $29 million and $121 million remained under the company’s repurchase authorization. I’ve stated on the last earnings call, share buybacks under this authorization are expected to be used primarily, but not exclusively to offset dilution associated with stock based compensation, which we expect will increase over the next several years. We also had one special item in the quarter for approximately $35 million related to our acquisition of The Athletic. It’s worth noting that we previously entered into an agreement to sell a small parcel of land adjacent to our College Point printing facilities, which resulted in a gain of approximately $34 million that will be included in our second quarter results. Let me conclude with our outlook for the second quarter of 2022 on The New York Times Group, which does not include The Athletic. Comparisons are to the company’s consolidated results for the second quarter of 2021 prior to the acquisition of The Athletic. The effect of The Athletic on our consolidated guidance has been included in the outlook section of the earnings release that we published this morning. For The New York Times Group, total subscription revenues are expected to increase 7% to 9% compared with the second quarter of 2021 with digital-only subscription revenue expected to increase 16% to 18%. Overall, advertising revenues are expected to increase 2% to 5% compared with the second quarter of 2021 with digital advertising revenues expected to be flat to down in the low single digits, partially as a result of more difficult comparisons in the prior year. Other revenues are expected to increase in the mid to high single digits. Both operating costs and adjusted operating costs are expected to increase 12% to 15% compared with the second quarter of 2021 as we continue investment into the drivers of digital subscription growth. However, we expect cost growth in our core business to slow considerably beginning in the second half of 2022. As Meredith said, we continue to expect to grow adjusted operating profit in 2022 in our core business before the impact of The Athletic. But we do not expect that growth to entirely offset the dilutive impact of The Athletic on a consolidated basis. And on The Athletic consistent with what we set on the deal announcement call in early January, we continue to forecast the slight reduction in operating losses relative to its approximately $55 million loss in 2021, and continue to expect significant improvement over the next several years. With that, we’d be happy to open it up for questions.

[Operator:]

We’ll now begin the question-and-answer session. [Operator Instructions] Our first question comes from David Karnovsky from J.P. Morgan. Please go ahead.

[David Karnovsky:]

Hi. Thank you. Meredith, I know it’s early, but can you maybe discuss key learnings on The Athletic so far and any view into your thinking at this point on how you might position or market the product in a larger bundle alongside the Times?

[Meredith Kopit Levien:]

Yes. Thank you and good morning. Listen, I’d say, we’re super excited about The Athletic as part of The Times now. I think we’re – echo what I said in my prepared remarks, we’re up to a really good start operationally. We’ve got a very clear playbook of what we have done to grow our subs and ads business at The Times. And we are well on our way to applying that playbook to The Athletic and we’re beginning to feel the effects of that in – certainly in audience development with lots more to come and we’ll begin to feel the effects of that on how we build and sort of optimize and perfect their funnel. And also as we apply a lot of ad know-how and build out ad products. So I’d say, broadly, we’re off to a very good start there. On the bundles, specifically, we intend to begin to introduce The Athletic into The Times bundle in the back half of this year. So sometime, in the second half, and I suspect you’re going to see that play out in a few different ways cross sell, up sell, inclusion in the bundle, we’re working through all that. Now I will say, I do think that’s the opportunity we’re most excited about a big reason for the acquisition and we think there’s a really big opportunity there.

[David Karnovsky:]

Okay. And then just on advertising, just wondering if you could maybe speak to what you saw through the quarter, including the impact from a lot of reader engagement around war coverage, and then kind of any softening of demand that maybe you saw due to macro issues or inflation or things like that. Thanks.

[Meredith Kopit Levien:]

Yes. I’d say, broadly, we continue to be optimistic about both our competitive position in the ad business. And I talked to my prepared remarks about the kind of wide and varied product set. And I think – we believe advertising will continue to be an important, digital advertising in particular growth driver for The Times. And what we saw in the first quarter was just some of the effect of the very dynamic macroeconomic environment. So big categories like tech or under pressure, we saw some marketers pull back with the onset of war in Ukraine. And I’d say, we’re seeing some advertisers pullback just on the premise of inflation and the kind of dynamism in the market generally. On the flip side, we’ve got a print business that performed really well in the quarter – in the first quarter ahead of our expectation. And one of the things to note there is, it tends to attract advertisers in different categories. We still get a lot of luxury business and live entertainment business and print and those categories were really strong. So I’d put it all broadly in the category of we’re feeling the effects of what’s going on in the economy on the business, but long-term, we’re optimistic about what we can do in advertising.

[David Karnovsky:]

Thank you.

[Operator:]

Our next question comes from Craig Huber from Huber Research Partners. Please go ahead.

[Craig Huber:]

Yes, good morning. Meredith, can you just talk a little further about the addressable market to 135 million people? Can you remind how much of that is outside the U.S., and also curious what percent of your digital subs right now are overseas versus where would that number say a year ago? That’s my first question.

[Meredith Kopit Levien:]

Great. Good morning, Craig. So we think the addressable market is, somewhere in the neighborhood of 135 million people and growing. We think about 50 million of those people are outside the U.S. And that’s we get at that number by saying, what is the number of people outside the U.S. in English will pay for a news subscription. And we see the addressable market as the reminder of 135 million domestically and that’s people who have either already pay or willing to pay for a subscription to news and/or shopping advice, recipes, games, sports information podcasts. So that’s sort of how we look broadly in it. And I’ll just say, I’m not sure, what you’re asking me directly, but I’ll say, at 9 million and change subscribers. We think we’ve got a long runway for penetration, both domestically and internationally. And I’d say in news and beyond news, and that the bundle is going to be a big part, particularly in the U.S. as how we penetrate. On international, I think we’re in the teams, Roland, do you want to give the number?

[Roland Caputo:]

So Craig, at the end of Q1, international stood at 19% of our subscribers. So the percent that was part of the net ads was a little bit higher than it has been in the last few quarters.

[Meredith Kopit Levien:]

And I’ll just add, Craig, the 135 million number comes from sort of long tracking the market and how many people pay and also from our own research about willingness to pay across that widening product set.

[Craig Huber:]

Okay, great. And then my other question, on the digital advertising front, can you talk about The New York Times competitive advantage with all the first party data you have increasingly so going forward, I got to think, how that sort of sets you apart from your peers out there.

[Meredith Kopit Levien:]

Yes. I’m happy to do that. We are probably three maybe four years into building and deploying a really robust first party data set and applying that to our proprietary ad units and really rich ad canvases. So both the units and the data underneath them are really – perform really well for marketers. And we are confident that we’re going to continue to build advantage there. The way to think about that is we just have an enormous amount of signal from our readers that we can use in privacy forward ways to do – to help marketers target. And it’s really working. And as with some of the other things that The Times does with data and the application of machine learning. So we use data and machine learning, obviously, on the subscription side of our business as well. It just kind of gets better and better. So you build more signal and you get better at deploying the signals. So we’re incredibly focused on the advantage. We’ve already built and believe we’re going to continue to add to it. And the sort of size – and the size of our audience and its depth of engagement for a publisher is a real differentiator as opposed for a platform, obviously platforms have enormous scale in how they do this. But for a publisher, we believe that makes us really advantaged and we’ve got a long track record. Now those products performing well for marketers. So we’re optimistic about it.

[Craig Huber:]

Great. Thank you.

[Operator:]

Our next question comes from Vasily Karasyov from Cannonball Research. Please go ahead.

[Vasily Karasyov:]

Good morning, Meredith. Wanted to ask you to tell us what you think is keeping those people who are in your addressable market, but are not subscribers yet on defense. What does your research show? Why are those guys not subscribers yet? And what would it take for them to become subscribers? And how long – what would the trajectory be in your opinion? Would it be like a steady growth? Will it be waves driven by new cycles or some other patterns? So would appreciate your thoughts on this.

[Meredith Kopit Levien:]

Yes, good morning. Good question. Let me first say, what does the trajectory look like? I just want to point to the new kind of medium long-term guide we gave on the last call, in which we reiterated here, which is we believe the next mile marker in the model is to get to 15 million subscribers, reminding you that that’s a sort of harder to achieve target than subscriptions by year end 2027. And we see that as a mile marker by no means and state. So that’s what I would say in terms of our plan for penetration now. I think it’s a really good question, like, what stops people from subscribing now, and I might flip it around a little bit and say, what gets people to subscribe is to make sure we are number one, able to convey the value of being in the subscribed state. One of the things we started talking to you about much more actively last year and began to do in the product much more actively last year is to differentiate between the anonymous registered and subscribed state. And there are a number of examples of that, but the most obvious one is I think in the second half of last year, we’ve launched our first subscriber only newsletters. And those are now 19 in number and I’ve said in my prepared remarks, we’re beginning to see real correlation with people who subscribers, who get those newsletters retaining better. We also see the sort of differentiated value for subscribers as something that over time will likely make more people convert as they see, yes, I can get a lot of news for free from The Times, but I get more. And I get something of even higher value if I pay. So a lot of our work is in demonstrating the differential value of paying, not that’s one thing. The second thing I’ll say is, I think we are sitting on an enormous amount of value both in news that is like insufficiently unlocked today for people and then across the whole breadth of value that The Times has to offer in recipes, games, shopping advice, sports information, podcast. And so much of the work is how do we actually expose people to that value in a way that they know it’s there. So that when I talk about the third pillar of our strategy as being about having an expanded and better connected product experience that’s really about unlocking more of the value for people through personalization, through better targeting, through better promotion – cross promotion within the product. And we think there our research tells us there is a real opportunity there to demonstrate to people that there’s a lot of value here that you might not even know that we have in an area where you may have a passion like sports information or game play that would make you subscribe where you might not otherwise. So that, that’s how we think about penetrating the market.

[Vasily Karasyov:]

Thank you very much.

[Operator:]

Our next question comes from Doug Arthur from Huber Research Partners. Please go ahead.

[Doug Arthur:]

Yes, thanks. Roland, maybe because I stayed up and watched the overtime period of the rangers.

[Roland Caputo:]

Yes, it was a heart break, complete heartbreak.

[Doug Arthur:]

That was a tough one. You got to disaggregate these subscriber numbers for me. You’ve got a number with The Athletic, without The Athletic, with the 67,000 kind of games that were you’ve now reversed. Can you break the number down and is the implied or stated news only? Did you say 312,000? Because that’s a pretty significant upside surprise if so.

[Roland Caputo:]

Correct. So let me start with this. We’re – as I started to talk about on the last call, when we announced it, we’re going to change our reporting to being more subscriber centric. What we really think that folks should focus on is our total number of subscribers and the amount of money they pay us on. In terms of APRU, we think that that is the best representation of the economics of the business. With that, we’ve got a few other ways we break it out, which we think are important. And you can see that in the release and the tables and the release. So we show the number of multi-product subscribers, which we believe is an important disclosure since we’re talking about making the bundle being much more important to driving our economics. We do show the digital only subscribers with a news entitlement, which we also think is an important disclosure since news is our main product and will remain that, will always be that. And then of course, we’re breaking out The Athletic as we have two reportable segments to give folks really good insight into how that, that business that we just acquired is going. So if – Doug, if you look at the digital only subscribers with news entitlements line on the table, you can see the comparison to both last year and the fourth quarter. So that comparison to the fourth quarter reveals an increase of 312,000 people. More people that have entitlements to the news product than did last quarter. So that’s the sequential way to look at it.

[Doug Arthur:]

And is it fair to say that, that relative to your expectations coming into the quarter, given the strong news flow, I mean, we’ve seen that Reuters news yesterday reported a big upside surprise in revenues. So do – did that drive the number, I guess is the question?

[Roland Caputo:]

I’d say two things drove our subscriber numbers. We had the newscycle, the big news about a war on the European continent in Ukraine. And then the acquisition of Wordle brought tens of millions of folks into our audience, which helped drive a lot of game subs. So we’re really happy with the numbers both in terms of the number of bundles we sold, the number of games standalone that we sold. It was a very good quarter. We’re very satisfied with it.

[Doug Arthur:]

Okay, great. Thank you.

[Operator:]

Our next question comes from Thomas Yeh from Morgan Stanley. Please go ahead.

[Thomas Yeh:]

Hi, great. Thanks for taking my questions. Meredith, I was hoping you could give us some thoughts on the local news initiative that Dean Baquet is now spearheading. How should we think about The Times level of investment? What kind of scope this entails? And maybe just framing that opportunity out and then a follow-up one more on The Athletic. Now that you’ve spent some more time with the company post close. Can you help us think through the seasonality of sports in terms of, which quarters might have more outsized opportunity and how we might think about that impacting kind of the cadence of the subscriber net ads there. Thank you.

[Meredith Kopit Levien:]

Sure. Good morning, Thomas. Both good questions. Let me start on seasonality. What we see in the historical pattern from The Athletic is that the second quarter, it actually mimics our own business. The second quarter tends to be slower seasonally and the back part of the year tends to be stronger. So similar to what we see at the times for the – what we now call The Times group and for our own news business. On the initiative, we announced thank you for noticing that the initiative we announced that Dean Baquet will be running, which is essentially a I’d refer to it as a really important talent. We aspire for it to be a really important talent development engine for really high quality journalism at a local level. I would say not material from an investment standpoint, there’s an enormous amount of know-how in the building. Dean is an extraordinary leader. I can’t quite say enough about him. He came out of the local ecosystem, and there’s an extraordinary amount of kind of know-how an expertise in the building. And the idea is to be able to use that expertise, to develop more high quality journalism at the local level, and to develop the talent than can do that. And I’ll just give you a comp for it. We have an incredible fellowship program already broadly for journalism where we bring Roland, I don’t know if you remember the number, but my guess is it’s in the dozens of people in every year as fellows I think they do a yearlong fellowship, and then after that, some of them get hired. Many of them go kind of into the broader news ecosystem. And I would regard this in a similar way, and I would also regard this as the times we – Roland and I both long said, and our publisher has long said the health of the ecosystem is quite important to The Times, and this is a way for us to make sure we’re playing our part in continuing to develop the ecosystem. But from a cost perspective, I would say nothing material for to be concerned about. And long-term, this is talent development, which is really good for the business and good for we think we’ve got an attractive model where we know how to develop talent and then see the attractive economics from that overall – over the time horizon, we’ve been talking about/

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Harlan Toplitzky for any closing remarks.

[Harlan Toplitzky:]

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

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.