New York Times Co. (NYSE:NYT) Q4 2016 Results Earnings Conference Call February 2, 2017 11:00 AM ET
Harlan Toplitzky - Executive Director, IR, Financial Planning & Analysis
Mark Thompson - President and CEO
James Follo - CFO & EVP
Meredith Kopit Levien - EVP and Chief Revenue Officer
Alexia Quadrani - JPMorgan
Doug Arthur - Huber Research
Kannan Venkateshwar - Barclays
Craig Huber - Huber Research Partners
Good morning, and welcome to The New York Times Fourth Quarter and Full Year 2016 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 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 Levien, Executive Vice President and Chief Revenue Officer.
Before we begin, I would like to remind you that management will make forward-looking statements during the course of this call, and our actual results could differ materially. Some of the risks and uncertainties that could impact our business are included in our 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, I turn the call over to Mark Thompson.
Thanks, 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 as a whole, as a strong vindication of our strategic direction. We are smartphone 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 distinct division and one which audience advertises around the world responded to in 2016.
Let me come first to our subscription businesses. President Trump was once again busy tweating this weekend but 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 unique users coming to us in November for example. And as for subscribers in Q4 we added 276,000 net new digital subscriptions to our News product.
The comparison that's more net new subscribers in one quarter than 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.
But perhaps the new President was referring to the New Year and guessing that there had been a post election low, if so wrong again. As you'll hear from Jim in a few minutes, we are continuing to see remarkably strong numbers of new subscribers. And remember that our digital subscription model was already accelerating even before the present intense new environment took hold.
Six years in, our pay model remains poignant and the pool of near at hand already engaged potential subscribers looks not smaller but bigger than the year or two ago. Print circulation also benefited in Q4 with the best quarter-over-quarter net growth in home delivery subscribers in over 8 years.
All of this means that at the end of 2016 if you add up print, digital news and digital crossword subscriptions, we had a total of 2.9 million paid subscriptions. Indeed I can announce that 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 have 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 the subscriber numbers and revenue. What makes our subscription first growth strategy possible is the quality of the work of our newsroom and editorial departments. Under Dean Baquet's and James Bennet's leadership, Times' journalism is in amazing form and audience is flocking to our political coverage of and commentary about a momentous period in the politics of America and the world. We are committed to covering this period and the new administration fairly but also rigorously and with neither fair or favor.
Indeed we've allocated an additional $5 million to the newsroom budget this year to pay for more journalism and especially more investigative journalism in Washington DC. Dean and the Newsroom publisher own roadmap of the future a couple of weeks ago and I encouraged anyone who is interested in the future of quality journalism and at The Times and elsewhere to read it.
As we look for ways to reach new subscribers and extend the path on New York Times brand. We're continuing 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 the iTunes store. And this morning, we announced an exciting new venture with Snapchat that will see us deliver a special version on our morning briefing to that very distinct and highly engaged audience.
Digital subscription revenue grew 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 important turning point for us as we saw the growth in these businesses more than make up the declines in our web homepage and direct sold banner businesses. Print advertising however remained tough for us as to the rest of the industry. In Q4 the year-over-year drop was 20% while it was 16% for the full year.
Now as I have noticed in previous courses, print advertising is far smaller proportion of our total revenue than it once was. Nonetheless it was out win taken with cost increases largely associated with our investments in future growth to impact by the top line revenue and profitability. Total revenue 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 investments and costs. We do believe that we've 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’ll launch in a few weeks time.
As you know we plan to use our accommodation in our New York offices far more efficiently that to will mean expense in 2017 but we expect it will lead to increase rental income beginning in 2018. And we’ll continue to invest in visual journalism in our new digital advertising business, 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 and most important we saw a spectacular rate of growth in our consumer business. We're confident that we can sustain or even accelerate that rate of growth.
We are a united company. We have a sense of mission which extends to every department. We know the truth is hard to find and we're all determined to provide reliable honest information and objective and insightful analysis and opinion to readers everywhere. And we believe that 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 reflects solid consumer and digital advertising growth but a very challenging print advertising environment. Adjusted diluted earnings per share was $0.30 in the fourth quarter compared to $0.37 in the prior-year. We reported GAAP operating profit of approximately $56 million compared to an operating profit of $88 million in the same period 2015.
Overall revenue is down 1% in the quarter with weakness in print advertising offset 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 increased 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 or 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 of the promotional discount. The large growth in net digital subscriptions also impact ARPU as we received only a partial quarter of revenue. We still experience 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 a 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 services 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 is 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 is down 8% in October, 7% in November and 15% in December. Earlier in the quarter we acquired the Wirecutter and the Sweethome - home recommendation websites that serve the guide to our technology gear, home products and other consumer goods. The affiliate revenue we earned from readers who purchase products recommended on the site 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 cost increased 5%.
As Mark said, we 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 for the cost grew in marketing to drive consumer acquisition, advertising, technology and the newsroom as a result of the election.
Non-operating retirement costs were down in the quarter to 2.5 million from 7.5 million in the prior-year. 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 options to immediately receive a lump-sum payment which 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 $20 million charge. The effect of this was to continue to reduce the size - the overall size and inherent risk is our plans, as well as to improve the funded status.
The second item relates to a $4 million gain we recorded related to the sales 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 company's reserve for uncertain tax positions.
Moving to the balance sheet, in December we used approximately $189 million in cash to retire a debt maturity. As a result of that principle repayment, our cash and marketable securities balance declined in the quarter and we ended the quarter at $738 million with total debt and capital 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 our 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 plan to consolidate the company's operations within our New York City headquarters from 17 floors we currently occupy to nine by the end of 2017. As Mark mentioned, we believe this will enhance our ability to work together while also allowing us to monetize eight floors which total approximately 250,000 square feet in addition to the seven 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 $5 million to $10 million in operating costs largely in rent for temporary office and moving costs.
We begin marketing the eight floors shortly and expect to begin recording rental income in 2018. We will also incur upfront 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 of our headquarters building.
Under our sale leaseback agreement we have the option to repurchase our lease space for $250 million in 2019 which we currently expect to exercise. These actions will not restrict us in any way under this agreement.
Now 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 a digital subscription revenue growth. We expect digital only revenue to grow at approximately 25%.
For the first quarter of 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 officials 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've provided on prior quarter's 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 full guidance on the number of additional subscribers we expect. However, we will continue to report the actual number of both news and crossword product subscription 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 costs related to the elevated level of marketing and advertising spend to support digital growth, as well as the additional costs associated with our acquired companies and cost 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.
Non-operating retirement costs are expected to be about $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 stated earlier 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. And finally I want to note that our 2017 fiscal calendar includes a 53rd week which will occur in the fourth quarter.
And with that, we’d 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. First I think you guys gave some color on the ARPU on the digital only sub, but do you actually have a number in terms of the - I guess revenue per subscriber is right now and then I have a follow up.
I think we probably gave quite a bit of number, you can probably get pretty close to that number. I think the ARPU was probably in the $13 to $14 range currently. And the point of my comment was largely that in the world where we're adding so many subscribers in the quarter and those are interactive offers that put a little bit pressure on ARPU. But sure…
And Alexia Mark here, the point being a lot of these the surge in new subscription happened after the election roughly from half way through the quarter. So you got people coming on to and becoming subscribers half way through the quarter. Many of them are on an initial discount. And that has - as it were transitory effects on ARPU, we expect as Jim said once I get the full price we'd expect some corrections in ARPU. I mean as Jim also said we are continuing to see really astonishingly large numbers of new subscribers, some of this effect will also be return in Q1 and possibly in future quarters.
Meredith Kopit Levien
And just to be clear if that discounting strategy for new subscribers is consistent with what we always do.
That's why we won't change the terms in which subscribers join us a result of the surge exactly the same as it was before.
And I guess Mark just following up on the really rapid growth you're seeing right now in the subscribers. I mean clearly it seems that President Trump just much [indiscernible] may actually be adding event to the news media in general. And I know you said those speculations about digital print have done better since the election or this recently. Do you think there is a real correlation here that - between all this sort of chaos or noise coming out that it is driving a lot more demand from news media? This could be sort of maybe sustainable trend at least in the intermediate term?
Alexia, we respect to imperial evidence. I would say that we are still learning by talking to subscribers and through qualitative research exactly what's going on. And I would say we're definitely seeing a significant uptick in people, as well expressed willingness to pay and therefore the conversion coefficients as it were. But we think there are multiple factors going on. I think the broader point is we are entering, I mean one might expect after a U.S. Presidential election a slight period of quite kind of transition followed by honeymoon period that's manifestly not the case.
We are 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. And I think as a kind of former journalist my judgment will be that there is plenty of connecting energy in the news cycle and that's why to continue for many months and possibly years.
Meredith Kopit Levien
Yes. And just to put point on it heightened interest is in - seems to be an independent original reporting other aspects of journalism and we think that's going to go on for some time.
Alexia it's also just worth saying that this is - we are seeing just in terms of interest in this country, but the whole world is watching what's happening in America, the American story is a part of a broader populist way, which is we have been hold of the western world. So we are also seeing real spike in international interest, I mean in these international subscriptions.
Yes, things are very large so that would happen. And then just sort of housekeeping I think Jim you mentioned the monthly numbers for the quarter in terms of the ad revenue, did you give any color on what you saw on January?
Meredith Kopit Levien
We are off to a pretty - I think we are 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 trends will be pretty similar.
Yes, I would say within our kind of high-single digit advertising as I said I think we'll and I also suggest that advertising and quarter will be up. Our 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. But we are not expecting that to change dramatically in the first quarter.
So, maybe modest improvement overall, but not much beyond that?
A modest improvement overall driven by somewhat improved digital results.
Okay. Thank you very much.
The next question comes from Doug Arthur with Huber Research. Please go ahead.
Yes, thanks. A question for Meredith on the digital advertising, if you - the percentage growth by quarters kind of wobble to all over the place, it's been good, bad and different. If you look at the dollar growth was $15 million in 2015 and about $12 million in 2016. So 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 need of a strong, I am wondering if you could just dig into some of the components and how your dollar growth going overall? Thanks.
Meredith Kopit Levien
Sure. And I'll just say, look I think we saw difficult first half in the year in digital advertising and pretty good second half of the year in digital advertising. So I'm 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 are seeing now is a real sort of pivot in the business the growth business is now which are branded content and smartphone and programmatic, video and marketing services.
Now together meaningfully larger than the legacy businesses, so larger than the home page and the direct sold business and 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. So we talked a lot last year about the lumpiness of the business in fact that we expected to see a comeback in the second half. I think we are just - those are becoming part of the regular business now, we have a bit more visibility into that.
Okay. Thank you.
The next question comes from Kannan Venkateshwar with Barclays. Please go ahead.
Thank you. So Jim, one on the cost side we've seen of course some investment last year and based on your guidance it looks like cost will remain elevated in the first quarter. When does the investment cycle ramp and is some of the cost grew up in account of variable like marketing, is it something that you would expect to remain elevated given the subscriber growth, so some color there would be great. Thanks.
So the answer is let me just talk broadly about what things drive the first quarter in big large office, we are to be spending more against marketing, I think that's both on the direct to consumer side and on some campaign side, that's. So we'll 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. We find ways to put money against that.
So that's something that's hard to predict, but there is no doubt that marketing spend in a business that we think very good about is likely to continue the elevated and we'll find ways to put money against that and we'll pull back where we don’t think it works. That's one of the components in the first quarter.
Acquisition is we are going to be into first quarter reflect now three acquisitions that we have done were largely - were none of those existed last year. And you'll see some of the cost in that way those cost to cost continue. And then we have got some other cost which I referred to - we are going to have some more dollars around the real estate project. I do think the way that plays out in the years we'll see some more elevated cost year-over-year higher in the first half, second half that will moderate for whole host of reasons.
There are some other one-time events in the first quarter that we don't think will repeat. But I think we'll probably be more elevated in the first half than the second. But we are going to be somewhat I think on the marketing side particularly we are going to have to be somewhat adaptable to opportunities as they arise.
So I can just reinforce that point Kannan. I mean I said in my remarks that we put on more new digital subscribers to our News products in Q4 the single quarter much of that happening by the way in the second half of the quarter than we did in whole two years 2013 and 2014. And we are going to be prudent about this, but I mean we are seeing spectacular numbers right now in Q1 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 go and spend the money. But obviously figuring out what work in learning and more work about how to scale investment.
Sure. And so just as a follow-up I mean there is obviously be 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, so is it fair to say that the organic number once you exclude the benefit of some of these restructurings is actually higher more in the high single digits or double-digits in terms of cost growth?
I would say – I’m not sure we pulling follow-up - what I would say is the things that isolated in Q1 when you pull it out suggest that the cost is relatively flat. But there is a number of initiatives inside the company that we talked about that will play out over the year that will pull what will be attacking our core cost.
Yes, I mean what I put this, we are progressively working on if you like the legacy cost base of the company which we expect to decline over time. The issue is for me now is about the level of investments in building the digital business. Obviously, the overall cost company CRO our blend of the two.
Right. Thank you.
The next question comes from Craig Huber with Huber Research Partners. Please go ahead.
Good morning. I had a few questions please. A couple of housekeeping questions. Jim your tax rate I guess adjusting for the various one-time items the last two years was roughly 36%, 37% assuming the FelCom doesn't change the tax rates here what do you think it's going to be in 2017?
Ex any sort of adjustments to reserves that could pull in and out and it does create a lot of noise, but 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 that's actually come down a little bit over the last couple of years there just been some benefit in tax the state tax rate.
But I think 40% is a good number I think long-term and in fact actually slightly beyond that topic I think any sort of adjustment to corporate tax rates I think will be a significant benefit to us as we are a high tax payer.
Okay. And then on the cost side you sound like you said if you strip out the acquisitions and the marketing costs and these headquarters related costs, obviously you can free up some space you have to rent out and actually take a lot and it sounds your costs are roughly flat underlying in the first quarter if I heard you correctly, you’re signaling that for the full year as well have you thought it?
I’d like to not go too deep other than already reaffirm what I just said. First of all let me say, we’ll be at elevated marketing spend in the first quarter both direct to consumer otherwise that's all part of that mix. And as I said, I think as the back half of the year goes we will see the first half of the last year we saw more flat cost in the back of the year including the fourth quarter we saw elevated costs and part due to acquisitions.
So 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 we see opportunities to invest we will do that and we’ll aggressively do that, but that's the way I think the year plays out without being more precise on that.
And then talk on the subject on the discounts that are offered on the digital subs for new subscribers here I mean, my sense is over the many years for you guys had offer in the marketplace for $0.99 per week for the first four weeks and then it reverts to the full price. But last year I seen it out in the marketplace looks like you had some offers out there or keep new subs to get the digital product for half price for the first 52 weeks than it goes to the full price that to me is sense that's different than prior years and stuff. I mean I don't see that in the marketplace right now we want to go in your website but is that offer still out there I guess main question?
Meredith Kopit Levien
So we’re always testing different kinds of offers, but in general the second offer you described the notion of half of for a period of time sometimes a year is a pretty standard offer in the market and when Mark answered the question about where ARPU was based on the sharp increase in subs in Q4 and then particularly at the end of Q4 that’s what he was referring to those offers tend to retain very well as well.
And that's an offer which you know - referring back to my early remarks pretty dates the Q4, the Q4 surge and although we reserve the right to continue to just offers one of the reasons what we introduce our offer tax and as well that is because as Meredith said it’s turned out to be highly effective at converting new subscribers into long-term subscribers.
Meredith Kopit Levien
It’s going to give them a long period of time.
Its gives them much longer time to habituate and get to use to it and to value the times.
So you’re just saying that’s one of the big reason why the ARPU was down so significantly in the quarter?
We’re saying that because of a lot of new subscribers arrived and as it was through the course of Q4 on that offer and they were accounted in the subscriber account in the quarter quite widely, but we only had a past quarter of subscribers paying half the regular amount. And it was the shared number 276 subscribers arriving mostly only for a few weeks and a half price and that's given the just a max, but we would expect the large number of those subscribers to retain over and to get the full price and to continue to be subscribers paying at the full price.
Meredith Kopit Levien
Right. I'll add to that we are also getting lot better as retaining them, so we are getting better and how we onboard and how we kept to engage with different parts of the offering.
And then my question, I appreciate that. On the print circulation side, what are you guys do for pricing, you generally raises those prices in January, but what happened this year throughout the U.S.?
Meredith Kopit Levien
We've done what we continue to raise prices in the range of…
What we have done in the past with slight variations, but generally in the range and we are feeling pretty good about.
Some of the early indications are encouraging about, it is early days but we have been encouraged so far by our retention results notwithstanding the price raises.
And Jim, you mean by up about 5% you are saying?
In that neighborhood, yes.
Excellent. Thank you.
This concludes our question-and-answer session. I'd 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.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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