The New York Times Company (NYSE:NYT) Q1 2023 Earnings Call Transcript May 10, 2023

Operator: Good morning everyone and welcome to The New York Times Company’s First Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please also note, today’s event is being recorded. At this time, I would like to turn the floor over to conference over Mike Brown, Vice President, Assistant General Counsel and Corporate Secretary. Please go ahead.

Mike Brown: Thank you, and welcome to The New York Times Company’s first quarter 2023 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. Our actual results could differ materially due to a number of risks and uncertainties that are described in the company’s 2022 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, Mike, and good morning, everyone. Last year, we presented the next phase of our long-term strategy with the goal of becoming the essential subscription for every curious English-speaking person seeking to understand and engage with the world. In the first quarter, we made steady progress on that strategy with clear signs of substantial runway ahead. Let me share some of the highlights. We crossed 3 million bundle and multi-product subscribers in the quarter and hit a number of new records for bundled uptake. We drove sequential ARPU expansion as we fully applied our value-based pricing strategy, we enjoyed the strongest enterprise-wide subscriber engagement we’ve seen in more than a year, and we slowed cost growth for the third consecutive quarter through disciplined cost management.

Our performance in the quarter reflects our strategy playing out as it was designed to, with our high-quality product portfolio and multi-revenue stream models, giving us a variety of levers for growth even in an uncertain market. And the cash-generative nature of our model was on full display. I’ll turn now to the quarter’s specifics. We added 190,000 net new digital subscribers roughly on pace with the last three quarters growth delay in miserable market headwinds. We now have more than 9.7 million total subscriber remain on the path for a goal of 15 million subscribers by year-end 2027. Thanks to aggressive marketing across all of our product [funnels] [ph]. We had our highest ever number of bundled starts in the quarter, highest percentage of bundle starts, and highest number of bundle upgrades.

This matters as strong uptake of the bundle is a positive signal of revenue growth because the average bundled subscriber engages more, pays more, and retains better than the average single product subscriber. Subscriber engagement in the quarter measured in weekly usage was especially strong driven in-part by high usage from early tenure subscribers, many of whom who bought the bundle. We also continued our deliberate efforts to grow top line audiences and widen our pools of high-quality prospects across our product portfolio. That work is intended to be a driver of medium-and-long-term subscriber growth. And also to counteract the headwinds on news we’ve talked about for some time now, including slowing referrals from the platform and fluctuations in demand driven by a changing used cycle.

While the full impact of this work will play out over time, we’re already seeing results. Progress was most evident on the Athletic where weekly active users are up 50% year-on-year, and new registrations have grown strongly. This is the result of leaning into covering the daily sports news cycle and big game moments, while tapping into new audiences by a time and off-platform. We’re pleased with this early progress, which validates our approach and sets us up well to capitalize on the big opportunity we see in sports. More than a year into our ownership, Wordle is still attracting tens of millions of passionate players each week and acting as a robust top of the funnel to both NYT games and the bundle. And we’ve been busy adding value to NYT games, so that as world players move deeper into the games funnel, they find more reasons to convert and retain.

We added sudoku puzzles into the app in the quarter and continue to drive strong engagement with Spelling Bee. Another area of momentum was pricing. We advanced a coordinated set of pricing strategies in the quarter, designed to drive the modest digital ARPU expansion we’ve been aiming for while continuing to scale subscribers. To optimize for conversion, we used attractive promotional pricing for the bundle in combination with a new full funnel bundle marketing campaign. We also continued to have success in the quarter stepping up subscribers on promotion to interim and full prices at the one-year mark. And the high levels of engagement we see with early tenure bundled subscribers give us confidence that we’ll be able to continue stepping up subscribers to higher prices as their tenure increases.

We also began rolling out price increases for tenured non-bundled news and games subscribers toward the end of the quarter, and we are pleased with the early results. We expect this component of the playbook to increase digital ARPU in Q2 and beyond, while driving even more people to the bundle as its relative price becomes more attractive. The net result is that in Q1, we had our fully coordinated value-based pricing strategy in action aimed at maximizing the lifetime value of our growing subscriber base. Let me turn now to average [indiscernible]. Macroeconomic pressure on our ad business is playing out largely as we thought it would, although visibility from quarter-to-quarter remains a challenge and we expect it to continue to impact our ad business in the near-term.

Given this volatility, advertising was down more than we expected in the quarter, a function of marketers pulling back on brand spend, especially in some of our largest categories like tech, finance, and media. We view this as cyclical, meaning nothing has changed in our optimism about advertising as a medium and long-term growth driver. In fact, there were a number of encouraging signs about the competitiveness of our ad product set and growth prospects. Direct sold premium display advertising held up well in the quarter, which we believe reflects the effectiveness of our proprietary ad canvases, and first-party data to drive performance for marketers. Athletic advertising was also strong. We doubled revenue over the last year, and we added new advertisers to the enterprise.

We have big ambitions for advertising, especially as we apply our high-performing ad products across the bundle. To help us realize those ambitions, during the quarter, we hired a seasoned new leader, Joy Robbins as Global Chief Advertising Officer. Joy is our first outside executive hire in advertising in a decade and has hit the ground running with our strong team. Beyond subscriptions and advertising other revenue, which includes our wire cutter affiliate business, licensing, and more was strong in the quarter. And is another testament to the power of our multi-revenue stream model. Let me spend a few minutes now on costs. Q1 was the third consecutive quarter during which we meaningfully slowed cost growth. Consistent with our plans in the last two quarters, we found efficiencies in three major areas.

First, given the fact that we continue to drive the vast majority of our subscribers starts, organically, we reduced our overall marketing spend while also making the dollars we did spend more efficient. These savings are strategic as we continue to lean into our product as a more and more effective driver of growth. We also continue to actively manage headcount growth, particularly in digital product development, where we have succeeded in attracting top-tier talent and expect growth to slow from here. And finally, we’re always on the lookout for ways to modernize our legacy operations and to find efficiencies. Over the last two quarters, that has resulted in modest headcount reduction in non-digital areas of our business and G&A functions.

I’ll summarize the quarter’s results by saying that we’re making steady progress executing our strategy in a dynamic market. While advertising continues to experience near-term challenges, our bundled strategy is gaining momentum subscriber engagement metrics are strong, pricing initiatives are taking hold and we’re slowing cost growth. Our strategy was purpose-built to give us multiple growth levers and we are confident that we’re on the path to building a larger and more profitable company. Now, before I close, I want to congratulate my colleague, Will Bardeen, will become our next CFO effective July 1. Will’s appointment follows the comprehensive search to identify roll-in successor. We evaluated many talented candidates, and it was clear that Will is the most uniquely suited and qualified leader to step into the role.

Will has served as the Times’ Chief Strategy Officer since 2018 and as a key leader within our finance organization. In my 10 years here, Will has been a driving force in all the major strategic decisions we made to put us on the promising path we’re on today. Few people understand our business, our strategy, and the market better than Will, and we’re confident he is the right person to help the Times deliver on our financial and operational goals. Among his early priorities as CFO, will be to ensure that we’re communicating as clearly as possible with investors so they understand the track of our progress. And finally, I want to take a moment to celebrate Roland and his 37-year career at the New York Times. Now many of you on this call know rolling personally and understand what a wonderful leader and colleague and person he is.

So, much of our strong relationships with the investment community our reputation as good stewards of capital and our commitment to financial discipline is attributable to Roland. And on top of being a remarkable strategic and financial operator and representative of the times, Roland has been a trusted partner an adviser to me and so many others, and I will miss him very much. Roland will stay on with the company through the end of September to help ensure a smooth transition of responsibilities and our entire team wishes him all the best and a well-deserved retirement. And with that, I will hand it back to Roland one last time.

Roland Caputo: Thank you, Meredith, and good morning. As Meredith said, in the first quarter, we made steady progress executing on our strategy with plenty of runway ahead. Turning to the specifics of the quarter. Adjusted diluted earnings per share was $0.19, $0.02 lower than in the prior year. We reported adjusted operating profit of $54 million in the quarter, lower than the same period in 2022 by approximately $7 million. Adjusted operating profit at The New York Times Group was approximately $62 million, a decrease of approximately $6 million, compared to the prior year, while the Athletic had adjusted operating losses of approximately $8 million, an increase of $1 million compared to the prior year. Please note that the first quarter of 2023 includes three months of results for the Athletic, while the first quarter of 2022 included only two months of Athletic results.

Free cash flow in the quarter was approximately $45 million, compared with negative free cash flow of approximately $23 million in the same period of 2022. The $45 million of free cash flow in the quarter was composed of approximately $51 million of operating cash flow, less approximately $6 million of capital expenditures. In the first quarter, the company added 190,000 net new digital-only subscribers with continued strong growth and adoption of the bundle. The number of digital-only bundle and multiproduct subscribers grew by approximately 520,000 in the quarter, driven mainly by increases to the number of new subscribers choosing to bundle augmented by existing subscribers who upgraded to the bundle. We now have over 3 million digital-only bundle and multiproduct subscribers.

Moving to revenues. Total subscription revenues increased approximately 7% in the quarter, with digital-only subscription revenue growing approximately 14% to approximately $259 million. Digital-only subscription revenue grew primarily as a result of the new subscriptions we have added in the past year, a large number of subscribers whose introductory promotional subscriptions graduated to higher prices subscribers who have upgraded to the bundle and the additional month of Athletic revenues in 2023. Print subscription revenues declined approximately 4% due mainly to lower volumes in both home delivery and single copy, partially offset by an increase in home delivery ARPU associated with the first quarter price increase. In addition, the new sand price for the daily paper was increased from $3 to $4 in mid-February.

Moving to digital-only subscriber ARPU, which includes all of our digital products. On a sequential basis, digital-only subscriber ARPU increased approximately 130 basis points, compared to the prior quarter. Compared to the prior year, digital-only subscriber ARPU decreased approximately 1%, due to 3 percentage points of dilution from the Athletic. It’s worth noting that during the quarter, approximately 550,000 digital news and game subscribers were notified of price increases on their individual product subscriptions. These increases will mostly take effect beginning in the second quarter. We expect to notify approximately 1 million additional subscribers of price increases for their subscriptions by the end of the year. Both digital and total advertising revenue decreased approximately 9% in the quarter, coming in below the first quarter guidance we issued.

The decline in digital advertising revenue was mainly due to lower revenue from our podcasts and other creative services, which was partially offset by higher advertising revenue at the Athletic. Print advertising was lower by approximately 9%, compared with 2022, primarily driven by declines in the media, advocacy, finance, and technology categories. These print declines were partially offset by growth in the luxury category. Other revenues increased approximately 16%, compared with the prior year to approximately $57 million. The increase is primarily the result of higher television and film, licensing and commercial printing revenues. Adjusted operating costs were higher in the quarter by approximately 6% as compared with 2022, primarily due to growth in the number of employees in our newsroom and an additional month of Athletic expenses, partially offset by lower sales and marketing costs.

[All set] [ph] The New York Times Group were less than 3% higher than prior year. I’ll now discuss the cost drivers for The New York Times Group. Cost of revenue increased approximately 6% as a result of higher journalism costs related to growth in the number of newsroom employees. Sales and marketing costs decreased approximately 19%, largely due to lower media expenses. Media expenses were approximately $29 million, approximately 34% below last year. Product development costs increased approximately 15% and as a result of growth in the number of digital product development employees in connection with improving our digital product portfolio. And general and administrative costs were higher by approximately 7% due to an increase in the number of employees needed to support the growth in our business over the last several years and one-time building maintenance costs associated with investments in more efficient lighting at our headquarters building, partially offset by lower outside services costs.

There were no special items in the quarter. However, a severance charge of approximately $4 million we booked in the quarter. Our effective tax rate for the first quarter was approximately 30% versus an expected marginal rate of 27%, due to a lower tax deduction on stock-based compensation vesting in the quarter. Moving to the balance sheet. Our cash and marketable securities balance ended the quarter at approximately $472 million, a decrease of approximately $14 million compared with the fourth quarter of 2022. The company remains debt-free with a $350 million revolving line of credit available. Share repurchases during the first quarter totaled approximately $31 million. Let me conclude with our outlook for the second quarter of 2023 for the consolidated New York Times Company.

Total subscription revenues are expected to increase 6% to 8%, compared with the second quarter of 2022 and with digital-only subscription revenue expected to increase approximately 12% to 15%. Overall advertising revenues are expected to decrease between 4% and 8%, compared with the second quarter of 2022, mainly due to macroeconomic conditions and the comparison to a strong quarter in print in 2022. Digital advertising revenues are expected to decrease in the low to mid-single-digits. Other revenues are expected to increase in the high-single-digits. Both operating costs and adjusted operating costs are expected to increase by approximately 6% to 8%, compared with the second quarter of 2022. We expect expense growth to slow later in the year, compared with the second quarter guidance.

Before we go to questions, I would like to take a moment here on my 21st and final earnings call to thank you with the sell-side analysts. For the time and effort you’ve put in covering The New York Times Company. I would also like to thank the investor community for their continued interest in and support of The New York Times. I’ve enjoyed working with you over the past five years and wish you all the best. And now we would be happy to open it up for questions.

Q&A Session

Operator: [Operator Instructions] And our first question today comes from Doug Arthur from Huber Research. Please go ahead with your question.

Operator: And our next question comes from David Karnovsky from JPMorgan. Please go ahead with your question.

Operator: And our next question comes from Vasily Karasyov from Cannonball Research. Please go ahead with your question.

Operator: And our next question comes from Kannan Venkateshwar from Barclays Capital. Please go ahead with your question.

Operator: Our next question comes from Thomas Yeh from Morgan Stanley. Please go ahead with your question.

Operator: And with that, we’ll be concluding today’s question-and-answer session. I’d like to turn the floor back over to Mike Brown for any closing remarks.

Mike Brown: Thank you for joining us this morning, and we look forward to talking to you again next quarter.

Operator: And with that, we’ll conclude today’s conference call and presentation. We do thank you for attending. You may now disconnect your lines.