Thank you, and welcome to The New York Times Company s first-quarter 2018 earnings conference call.

Transcription

1 The New York Times Company First-Quarter 2018 Earnings Conference Call May 3, 2018 Harlan Toplitzky Thank you, and welcome to The New York Times Company s first-quarter 2018 earnings conference call. On the call today, we have: Mark Thompson, president and chief executive officer; Meredith Kopit Levien, executive vice president and chief operating officer 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, and our actual results could differ materially. Some of the risks and uncertainties that could impact our business are included in our 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. Mark Thompson Thanks Harlan, and good morning everyone. Q was another strong quarter for the company, with overall revenue UP, profit UP, and continued strong growth in our digital subscription business. We ve won three more Pulitzer prizes since the last time we spoke to you: the Pulitzer for Public Service for our reporting of sexual harassment, the sixth public service Pulitzer in our history, more than any other media company; the Pulitzer for National Reporting, for coverage of Russian interference in the 2016 presidential election; and the Pulitzer for Editorial Cartooning, for a strikingly original illustrated series in our Opinion Section about Syrian refugees in the U.S. 1 FINAL

2 The cornerstone of our entire strategy as a company is investment in the best journalistic and creative talent in the world. It s very pleasing to see it honored in this way. Today is World Press Freedom Day, which has been marked every May 3rd for the past 25 years. It s meant to remind people of the perils faced by journalists around the world and unfortunately, this year, it is more important than ever to take notice. We re in the middle of one of the deadliest weeks anyone can remember for journalists around the world with many killed in Kabul, one in Gaza and scores more imprisoned around the world. Too often, journalists risk their freedom, and in some cases, their lives to report the truth. Our business is based on the pursuit of that truth and we stand with our colleagues around the world in defense of our profession s responsibility and commitment to free and fair reporting in the public interest. Now turning back to the business of the call, we have a new CFO, Roland Caputo, whom you ll be hearing from for the first time in a few minutes. We interviewed many internal and external candidates for this key role and appointed Roland because of his combination of strategic imagination and operational mastery and because we judged him best able to help us accelerate our digital transition. I m really looking forward to working with him in this new role. Let s turn now to the quarter, beginning with our digital subscription business. We added a total of 139,000 net digital subscriptions, of which 99,000 were to our digital news product, and the balance to our Crosswords and Cooking products. We ended the quarter, therefore, with a grand total of 2,783,000 digital-only subscriptions. Total subscriptions, including print, are now in excess of 3.7 million. Retention of our core digital news product remains a very encouraging story we continue to retain the post-election cohorts, some of whom are now well over a year into their subscriptions, at least as well as earlier cohorts. Revenue from our digital-only subscription business was up nearly 26 percent compared to the same quarter a year earlier, at $95 million dollars, while print subscription and single-copy revenues were down less than 1 percent. Digital subscriptions are clearly a success story for The Times and we believe there is real scope to accelerate progress further. In recent quarters, we have been ramping up both brand and direct marketing spend, and will continue to do so as long as the investment makes sense. Let me turn to digital advertising. As I ve said in previous calls, the character of our advertising model, with its increasing reliance on strategic commercial partnerships and often large individual campaigns, means more lumpy results than was the case, say, three years ago, as individual partnerships and campaigns come on and off stream. As predicted, this variability, combined with somewhat lower audiences compared to the post-election and inauguration highs of the first quarter of 2017, mean that Q got off to a subdued start with digital advertising revenue in the quarter falling 6 percent year-over-year. We re very pleased with our pipeline, 2 FINAL

3 however, and while we expect Q2 to be another down quarter, we re confident we will return to solid year-over-year growth in digital advertising revenue in the third quarter. In a rapidly evolving digital ad marketplace, we believe that our differentiated offering, the safety of our environment and the growing desire of the world s biggest brands to associate themselves with The Times, position us for success. Print advertising performed better than we expected in the quarter, declining by only 2 percent compared to the same quarter a year earlier. We do not view this as a new trend, however, and as you ll hear, expect a decline rate in the second quarter more like some of those we experienced in Adjusted operating costs were $10 million dollars higher in the first quarter than a year earlier, as we continued to invest in Times journalism and digital products. Given the significantly higher overall revenue driven in particular by that growth in digital subscriptions, the net result for the company as a whole was adjusted operating profit of $55 million dollars compared to $50 million a year earlier. In previous earnings calls, I ve talked about innovation in areas like VR, AR and audio. This year, you will see us turn our attention to television. First up at the end of May is an independent Showtime documentary, where The Times newsroom and our coverage of the first year of the Trump Administration is the subject. And, we have our own projects in the works, including a recently announced agreement with Anonymous Content that will help us accelerate moving Times journalism into film and TV. The first big project coming from this arrangement is a planned feature film based on The Times s coverage of the Harvey Weinstein story. And, we re developing our own TV offering, which we expect will do on television what our podcast, The Daily, has so successfully done with Times journalism in audio. More news on that project is coming soon. But now, for more detail on the quarter s results and with guidance for Q2, let me hand over for the first time to our new CFO, Roland Caputo. Roland Caputo Thank you, Mark, and good morning, everyone. Before I begin discussing the quarter this morning, I d like to thank everyone for the warm wishes that have come my way over the past week. I am excited by the prospect of enabling the company to execute on its subscriber-first strategy in order to further accelerate top-line digital revenue growth and long-term profitability. Given my background as a business operator, I also 3 FINAL

4 look forward to the opportunity to continue to improve operational excellence across the organization. Now let s get to the quarter: As Mark said, this quarter represents another strong one for the Company. Adjusted diluted earnings per share was 17 cents in the first quarter, compared with 10 cents in the prior year. We reported adjusted operating profit of approximately $55 million dollars in the first quarter, compared with an adjusted operating profit of $50 million dollars for the same period of Total subscription revenues increased 8 percent in the quarter, with digital-only subscription revenue growing 26 percent in the quarter to $95 million dollars. On the print subscription side, revenues were down slightly due to declines in single copy revenues. Total daily circulation declined 9.4 percent in the quarter compared with the prior year, while Sunday circulation declined 7.1 percent. These declines reflect difficult comparisons with the first quarter of 2017 when we experienced elevated post-election demand for the newspaper. Volume declines were mostly, but not entirely, offset by price increases for both home delivery subscriptions and the single copy daily cover price. ARPU on our digital-only news products increased sequentially in the first quarter as subscribers who initiated subscriptions in late 2016 and early 2017 continued to cycle off of promotions and graduate to full price. We expect this improving trend in ARPU to continue. Moving along to advertising, we reported that total advertising revenue declined 3 percent compared to the first quarter of 2017 as both print and digital advertising were lower in the period. The six percent decrease in digital advertising revenue was driven by continued declines in direct-sold desktop display, which more than offset growth in smartphone advertising. Print advertising, while lower than the first quarter of 2017 by 2 percent, showed strength relative to recent trends as declines in the luxury, retail and entertainment categories moderated considerably in the quarter and were mostly offset by growth in the media, advocacy and financial categories. On a monthly basis, compared to last year, overall advertising revenue declined 3 percent in January, grew 2 percent in February and declined 9 percent in March. It s worth noting that these monthly results were slightly skewed as we published a T Magazine in February of this year, while the comparable issue was published in March of Because of this, the February 2018 result was boosted by approximately three and a half percentage points, while March was depressed by a similar amount. Other revenues grew 5 percent versus the first quarter in 2017, to $28 million dollars, principally 4 FINAL

5 driven by affiliate referral revenue from the product review and recommendation website, Wirecutter, as well as from our commercial printing business. This growth was partly offset by a decline in our live events business. In the quarter, we completed the renegotiation of our driver s collective bargaining agreement, which culminates a multi-year effort to renegotiate all of our major craft union contracts. This has resulted in two significant benefits. First, it has allowed us to reduce current and future operating costs related to the production and distribution of the New York Times newspaper. Additionally, it, enables us to further monetize our College Point production facility through commercial printing. In the first quarter, we began producing and transporting the Newsday family of products and expect transition of this work from Newsday facilities to our College Point facilities will be complete by the end of the third quarter. Both GAAP operating costs and adjusted operating costs increased 3 percent in the quarter. In both cases, the cost increase was related to higher compensation costs, which were partially offset by lower print production and distribution costs. In the quarter, we recorded one special item, which has been excluded from our adjusted results. This nearly $2 million dollar charge represents non-capitalizable expense related to the reconfiguration of our headquarters building to make more space available for rental income. We have signed leases for 4-and-a-half floors and we expect to begin recording rental income in the second quarter. We anticipate recording rental income on the remaining floors in the second half of this year. As we mentioned on our fourth quarter call, the rules with respect to pension reporting have changed. Beginning with this quarter s results, interest cost, amortization of prior service credit, and gains or losses from our pension and other post retirement benefit plans have been presented outside of operations on a new line item titled Other components of net periodic benefit costs. The service costs related to our pension activity will continue to be presented within our operating results. We believe this is a fairly immaterial change for us, as we have historically adjusted most of these items out of our non-gaap adjusted operating profit measure. Previously, however, our adjusted operating profit included the benefit of prior service credits, which, as I noted, are now presented outside of operations. Our prior year s results have been recast for comparability purposes. The change in this item increased our adjusted operating costs, thereby lowering adjusted operating profit by approximately $2 million dollars for the first quarter of 2018, approximately $2.4 million dollars for the first quarter of 2017, and approximately $9.7 million dollars for the full year of Our effective tax rate for the first quarter was approximately 20 percent as compared with 45 percent in the first quarter of 2017, a result of the tax legislation that was enacted late last year, 5 FINAL

6 as well as a one-time benefit from stock-based compensation. Moving to the balance sheet, our cash and marketable securities balance increased during the quarter, ending at $749 million dollars. Total debt and capital lease obligations, principally related to the sale-leaseback of our headquarters building, were approximately $251 million dollars. Let me conclude with our outlook for the second quarter of Total subscription revenues are expected to increase in the mid-single digits, compared with the second quarter of 2017, with digital-only subscription revenue expected to increase approximately 20 percent. Overall advertising revenues are expected to decrease in the low-teens, compared with the second quarter of 2017, and digital advertising is expected to decrease in the high-single digits with a return to solid growth in the third quarter. Other revenues are expected to increase approximately 25 percent. Operating costs are expected to increase in the low-single digits, while adjusted operating costs are expected to increase in the mid-single digits, compared with the second quarter of 2017 as we continue to invest in marketing and other efforts to drive incremental subscription growth. And with that, we'd be happy to open it up for questions. Harlan Toplitzky Thank you for joining us this morning. We look forward to talking to you again next quarter. 6 FINAL