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New York Times Co (NYT) Q2 2019 Earnings Call Transcript

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New York Times Co (NYSE: NYT)
Q2 2019 Earnings Call
Aug 7, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to The New York Times Company's Second Quarter 2019 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Harlan Toplitzky, Vice President, Investor Relations. Please go ahead.

Harlan Toplitzky -- Executive Director of Investor Relations and Financial Planning and Analysis

Thank you and welcome to The New York Times Company's second quarter 2019 earnings conference call. On the call today, we have Mark Thompson, President and Chief Executive Officer who is joining us from our office in London. While in New York we have Roland Caputo, Executive Vice President and Chief Financial Officer and Meredith Kopit Levien, Executive Vice President and Chief Operating Officer.

Before we begin, I would like to remind you that management will make forward-looking statements during the course of this call and our actual results could differ materially. Some of the risks and uncertainties that could impact our business are included in our 2018 10-K. In addition, our presentation will include non-GAAP financial measures and we've 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 J. T. Thompson -- President, Chief Executive Officer and Director

Thanks Harlan, and good morning everyone. While we have another encouraging quarter with good growth in both digital subscriptions and digital advertising and the successful launch of our new television series The Weekly. We have these positive results to a sound strategy, the commitment and hard work in growing digital expertise of all of our colleagues and above all to the dedication and talent of our amazing reporters, columnists and editors.

Having the best journalists in the world are not so secret source and that's why we continue to increase our investments in journalism. But let's in terms of the calls and begin as usual with digital subscriptions. Our core new subscriptions grew faster than we'd expected.

This quarter, we added 131,000 net new subscriptions to our core news products. Of these 8,000 came from a Google promotion and should be considered a one-off. The remaining 123,000 net adds, still represents a significant year-over-year increase on the 68,000 we saw in Q2, 2018. It's the strongest Q2 performance in years with a milder than expected second quarter debt. Several factors account for this. Some big news stories, the effect of the more aggressive introductory offer pricing we introduced last year and growth optimization, driven by a much higher number of better designed tests.

From subject to the dollar a week introductory offer, the first US subscriptions began on its promotion are about to reach that first anniversary. We're obviously going to track them closely over the coming weeks and months, but I can tell you that retention continues to trend similar to previous cohorts. Now as you know we're committed not just driving immediate subscription results but to ensuring that we deliver strong growth in the medium and long-term. We've talked in recent earnings calls about the testing we've been doing to further optimize our pay model with a particular focus on scaling direct relationships and engagement.

When a user is registered and logged in, we can communicate with them and understand their preferences and patterns of consumption, more effectively than if they were anonymous. That typically leads the higher engagement and subscription conversion. At the start of July, we launched more extensive testing of registration and login.

The test play out differently on different platforms and we plan to experiment with a range of parameters and business rules how many free articles are given and user is able to read for example in return for registration over the coming months. We don't expect this testing to have a dramatic near-term effect on net subscription additions. Over time, however, we believe that the growing numbers of registered and logged in users of The Times will help us maintain or increase our momentum in building out our subscription base.

Turning back to Q2, 2019. We also added 66,000 new subscriptions to our Cooking and Crosswords products. The Cooking product which crossed the 250,000 subscription mark in the second quarter and the Crossword product with more than 500,000 subs of its own right, are two of America's largest digital subscription products from a news provider. Together with the growth in the call that made for 197,000 new digital subscription ads and a grand total of 3.8 million digital only subscriptions for the company.

Q2 2019 was also a good quarter for advertising. Digital advertising grew by 14% year-over-year with a strong performance in direct sales including from The Daily and our creative services. These gains on the digital side were more than enough to offset familiar secular declines in print and total advertising revenue grew slightly. Now Roland will give you guidance on advertising for Q3 in the moment, but it's worth noting now, that we don't expect the second half of 2019, to be a strong in digital advertising as the first half.

In recent quarters, we've been tracking against relatively weak digital advertising comparisons from a year earlier. That's played a part in the significant year-over-year gains we achieved in those quarters. From Q3 onwards we begin to comp against the strong gains from last year and we expect that to have an impact. One of the factors that contributes to the comp challenge is what I previously called lumpiness. Our digital advertising business is increasingly focused on large scale multi-month and in some cases multi year partnerships with some of the world's leading brands, demand privatizing partnerships with The New York Times is strong. Indeed, in recent months we've included some of the largest deals in our history as a company, deals from which we will see much of the benefit in 2020.

These partnerships are distinctive and difficult to replicate and give us real pricing power. And that's why we're pursuing them so energetically and are willing to accept the increased variability that comes with them. A big moment for us in Q2 was a successful launch of our television series, The Weekly, which premiered in June on FX and Hulu. The Weekly is a fabulous opportunity to expose Times Journalism to new audiences in an exciting new medium. Both we and our partners are very pleased with its progress so far.

The Weekly is the largest driver of the 30% growth in other revenue in the quarter. But The Weekly is important for another reason. Along with The Daily, Wirecutter, and our Cooking and Crossword products. It's evidence of the extensibility of The New York Times brand across verticals and across different media and of our ability to delight and engage audiences far beyond our traditional heartland. It's this breadth of appeal, the enthusiasm and imagination with which our newsroom is embracing these new expressions of Times Journalism combined with the continued strength of our core digital subscription offering that gives us so much confidence in our future.

Let me hand over now to Roland for more details on the quarter.

Roland A. Caputo -- Executive Vice President and Chief Financial Officer

Thank you, Mark, and good morning everyone. As Mark said, we remain pleased with the progress as we continue to execute against our strategy. Adjusted diluted earnings per share of $0.17 was flat compared to the prior year. We reported adjusted operating profit of approximately $56 million in the second quarter, which is lower compared with the same period in 2018 by approximately $4 million. Total subscription revenues increased 4% in the quarter with digital only subscription revenue growing 14% to $113 million.

On the print subscription side, revenues were down 2.5% due to declines in the number of home delivery subscriptions and continued shift of subscribers moving to less frequent and therefore less expensive delivery packages as well as a decline in single copy sales. This decrease in print subscription revenues was partially offset by a home delivery price increase that was implemented early in the year.

Total daily circulation declined 8.5% in the quarter compared with prior year while Sunday circulation declined 7.1%. Quarterly digital new subscription ARPU declined approximately 9% compared to the prior year and approximately 2% compared to the prior quarter. As the impact from the number of newly acquired subscribers on promotion largely at $1 per week with significantly larger than the benefit from existing subscribers whose promotional offers ended and graduated to full price.

We expect that the more aggressive promotional offer, which resulted in another strong quarter for net subscription additions and other promotional tests will continue to put downward pressure on ARPU throughout 2019 total advertising revenue grew 1.5% compared with the prior year with digital advertising growing 14% and print declining by 8%. The increase in digital advertising revenue was largely driven by growth in direct sold advertising on our digital platforms including advertising sold in our podcast and our creative services businesses. The print advertising result was mainly due to declines in the financial services, retail and media categories, partially offset by growth in technology. Other revenues grew 30% compared with the prior year to $45 million, principally driven by the premiere of our television series, The Weekly, which debuted on June 2nd and from our commercial printing operations which had not yet achieved full scale at this point last year.

GAAP operating costs and adjusted operating costs each increased approximately 7% in the quarter, as a result of increased content costs, reflecting both higher staffing in the newsroom as well as production costs related to The Weekly. Expenses associated with our growth in the commercial printing business and higher advertising also drove the increase. Our effective tax rate for the quarter was 27%. On a going forward basis, we expect our tax rate to be approximately 26% on every dollar of marginal income we record. To enlarge part to a tax benefit we received in the first quarter of 2019. We now expect the effective tax rate for full year 2019 to be between the high teens and low '20s.

Moving to the balance sheet, our cash and marketable securities balance increased during the quarter, ending at $847 million. Total debt and finance lease obligations, principally related to the sale leaseback of our headquarters building, which we expect will be repaid in December 2019 were approximately $254 million. Let me conclude with our outlook for the third quarter of 2019. Total subscription revenues are expected to increase in the low to mid single digits compared with the third quarter of 2018, with digital-only subscription revenue expected to increase in the mid-teens. Overall advertising revenues and digital advertising revenues are expected to decrease in the high single digits compared with the third quarter of 2018.

Other revenues are expected to increase approximately 25% to 30%, largely due to our television series, The Weekly. Both operating costs and adjusted operating costs are expected to increase in the high single digits compared with the third quarter of 2018, as we continue to invest in the drivers of digital subscription growth. And with that, we'd be happy to open it up for questions.

Questions and Answers:

Operator

[Operator Instructions] The first question comes from John Belton with Evercore. Please go ahead.

Mr. Belton your line is open on our hand.

John Thomas Belton -- Evercore ISI Institutional Equities -- Analyst

Thanks everyone. I just wanted to talk a little bit more about the digital advertising business, which I'm sure is going to be a focus of attention here given the new guidance, so I just looking for any additional color on some of the underlying trends. Is there any part of the business that has meaningfully weakened recently. Is this more of a broader market issue. Just kind of a lumpy business with tougher growth comparisons because I know if I look back over a five-year period you've grown digital ad revenues at double digits. On average, is there any reason to think the trajectory of this business has changed now relative to where you saw three months. Yeah. Thanks a lot.

Meredith A. Kopit Levien -- Executive Vice President and Chief Operating Officer

Good morning, John. This is Meredith, a couple of things to say there. First I think broadly answer to your question. And I would say, demand for what the time is selling in the ad business remains very strong. I think we've got a unique proposition, which is grounded in brand safety and adjacency to IP that matters. And it's important and inability in a certain launch creative ideas in the world at scale. And I don't think, we don't feel demand changing for that in anyway. And I don't expect that it will. I think what you're really looking at here is that the comps matter a lot, particularly in the back half of the year. So I think we were up in the low 30s percent in the fourth quarter last year in advertising. As Mark alluded to in his remarks, we feel quite confident in our strategy of selling a combination of media and partnerships and services in each of those things drives the other as the business get more and becomes more about partnerships. There is just more variability in the system because the timing of these things differs from the year-to-year.

But we remain very confident in the strategy, we remain optimistic that the demand that we've seen over the last number of years is very much there, and we remain confident and optimistic about our ability to deliver on that.

John Thomas Belton -- Evercore ISI Institutional Equities -- Analyst

So over the longer term, you still view this as a nice growth driver for the company.

Meredith A. Kopit Levien -- Executive Vice President and Chief Operating Officer

Yes. And as we've said in previous calls. And I think it remains that and also that the better we do on subscriptions and engagement, the better that is for the ad business over the long haul.

John Thomas Belton -- Evercore ISI Institutional Equities -- Analyst

Great. Makes sense. Thank you very much.

Operator

Your next question comes from Alexia Quadrani with JPMorgan. Please go ahead.

Alexia Skouras Quadrani -- JP Morgan Chase & Co -- Analyst

Hi, thank you so much. Just have a few questions. Earlier this year, I think you spoke about exploring possible price increase in your digital subscription service. I guess any update or any more thoughts on that. And then I have a couple more.

Meredith A. Kopit Levien -- Executive Vice President and Chief Operating Officer

Sure. Hi, Alexia. I -- Yes, we did talk about that in the second quarter, we launched a pretty substantial price increase test on a population of users, who have been with us. I think for a couple of years or more, and we are very pleased with the results of that test exceeded our own expectations. So I would say what we take from that is that we do have pricing power and that there is a lever to be used sort of as we see fit and remains to be seen when we may use that lever and as I've said in previous calls, I think we've got real opportunity on price on both the demand curve and you're beginning to see us now exercise that as I just described in a test at the high end and also as we continue to make use of introductory offers.

Alexia Skouras Quadrani -- JP Morgan Chase & Co -- Analyst

And then on the churn, I know, I think you had a promotional offer somewhat similar in Europe, that you sort of to hear [Phonetic] August 2018. Can you -- I think it's been now at least several months since our initial offer was anniversaried. Can you give us an update on how churn is trending, from those subscribers maybe as a potential read into how we may see it here in a month or few months from here.

Meredith A. Kopit Levien -- Executive Vice President and Chief Operating Officer

Absolutely. And I would say, just broadly to reiterate what Mark said at the top of the call. Our -- the picture of retention for the whole base of the $1 a week subscribers looks quite similar to previous cohorts. So, there is nothing in what we've seen so far. I think we're 10 months, and domestically in 13, 14, 15 months. Internationally, there is nothing we've seen so far that troubled us. We are two or three months into renewing the folks that came in on that promotion internationally. And I would say the same thing, we used with what we've seen so far. And then I'll say something I've said in previous calls, which is, we've had very substantial cohorts of people in the past to sort of all over three, four, five month period arrive at a step-up and then we had that at the end of 2017 and beginning of 2018, a very large cohort of people who came in just after the election of 2016 and we moved through that moment. Well ahead of our expectations and what that gave us is for it to be operational muscle to know how to move through this moment. So I'm very confident that it doesn't all come at one. So I think we launched $1 a week domestically in the US at the end of August last year and then it flows through obviously profit the whole ensuing year and we are sort of very prepared to operationalize around, if there are particular cohorts of people or users

** we need to step up in price. So I'm confident that we'll move through this moment, as we have, the prior ones.

Alexia Skouras Quadrani -- JP Morgan Chase & Co -- Analyst

Thank you. And just one quick follow-up on the digital. I know you guys have talked about digital advertising as paramount already on this call, but I just want to clarify, it sounds like demand is very, very strong. Just a little bit lumpier and obviously the comps are a challenge. I guess my question is how much visibility do you have of how far out do you see that demand of digital advertising and doesn't this strong demand at The Daily which I believe is lumped in there, does that becomes bigger and bigger does not maybe add take away a little bit of the volatility?

Meredith A. Kopit Levien -- Executive Vice President and Chief Operating Officer

I think it's a big ad business. So something has to be very, very big to take away volatility in a meaningful way. And I'll say The Daily is certainly much larger than we expected and ascended ad product, but it's still when you think about the scale of our ad business, so generally over time, I think it will do that. We added a second add into The Daily at the end of June. So I expect that over time also have a positive impact. And I'll just say in general and you're getting this, there is real demand for audio advertising in association with quality unique content that has big audiences and so we're optimistic that over time our other podcast in addition to The Daily will become meaningful ad products.

Mark J. T. Thompson -- President, Chief Executive Officer and Director

And Alexia, if I can just add from London. I've been in the room for some of these deals and the large-scale partnerships we're doing, for example, our partnership with Verizon around 5G, is something which extended over a long period of time, months and indeed years, and is shaping up to be really quite the partnership. So I think as we scale these big partnerships over time that will, to some extent offset the lumpiness that we've seen in recent quarters.

I think it's fair to say that this is probably going to be always a somewhat more variable business than the old as we're fairly pure kind of -- simply display based business, but we do know that some of these partnerships are lasting so long, but we have some visibility into the future of those deals at least. But I think just to reemphasize what Meredith said the demand for what we're doing, I'll just come from some sales meetings here in London remains very high indeed. We feel very excited about the sale into The New York Times and the new people want to work with us.

Meredith A. Kopit Levien -- Executive Vice President and Chief Operating Officer

That's right. And I would also just add the fact that we have a uniquely worldwide asset based sort of media possibilities to put into a partnership, digital advertising, the paper, audio, creative services, live events, there are few if any who can match that at the scale of The New York Times and I don't think demand forging the ad business for a long time. I don't think the demand for that goes away.

Alexia Skouras Quadrani -- JP Morgan Chase & Co -- Analyst

Thanks. Thanks very much.

Operator

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

Vasily Karasyov -- Cannonball Research -- Analyst

Thank you. Good morning, Roland. I wanted to ask you a couple of questions on the cost growth in Q3 and what it implies for Q4. Hopefully for outer years too. So can you give us an idea, A, what the growth rates would be for production costs and SG&A may be. And then, what percentage of the cost growth is variable versus fixed and if it's variable what it's driven by, is it related to the $1 a week promotion rolling off, just help us dimensionalize how this will be? What the trajectory will be?

Roland A. Caputo -- Executive Vice President and Chief Financial Officer

Yeah, let me start a little bit maybe the best place to start by breaking down what happened in the past quarter. So that there is some clarity there. So of the total operating costs, right the increase was 7.2% and that broke out to be 11% growth in production costs, and what was the driver there was investment in content, some news and editorial for the newsroom, and also we've had the costs for production costs associated with creating the television show, The Weekly for the first time. And then we had commercial printing at full scale cycling on commercial printing at less than full-scale.

And SG&A was just kind of, that was about a 4% increase and that increase was kind of spread among a bunch of areas, will highlight that marketing was not a significant driver of SG&A. So we don't typically get into the details of future quarters, but we talk about what our investment thesis is and so we could expect a similar breakout of cost growth, we'll continue to invest in our content. We'll have a full quarter of production of The Weekly, we'll finish the cycle on the scaling up of the commercial business and we are focused as we go forward into future quarters to drive our LTV to CAC ratio up.

So, we're expecting to continue to invest in our product capabilities and with the desire to drive up our percent of organic versus paid starts and drive our LTV to CAC ratio up, which is going to benefit, profitability of the company.

Meredith A. Kopit Levien -- Executive Vice President and Chief Operating Officer

And worth saying which we saw in the second quarter. So the product itself in the second quarter was a better engine of making people form a habit pay and stay [Phonetic] than in previous quarters versus paid marketing.

Vasily Karasyov -- Cannonball Research -- Analyst

So if I wanted to, if I looked at last year, quarter-to-quarter progression of SG&A. For example, that would not be a good indicator for how things will go this year.

Mark J. T. Thompson -- President, Chief Executive Officer and Director

I don't know, I'm not sure how valuable that would be.

Vasily Karasyov -- Cannonball Research -- Analyst

All right, thank you very much.

Operator

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

Douglas Middleton Arthur -- Huber Research Partners -- Analyst

Yeah, thanks. Well, just to clarify, Is the marketing spend in the second quarter was not as high as expected? So do you anticipate in your third quarter guide that you'll get back to kind of that 45 plus million area you had been running?

Mark J. T. Thompson -- President, Chief Executive Officer and Director

Well, our goal and whether this explicitly happens in the next quarter over several quarters is to get the product to do more of the work that marketing has been doing in the recent quarters. So we would hope to be able to accomplish that over the next few quarters.

Douglas Middleton Arthur -- Huber Research Partners -- Analyst

So OK, so marketing spend may not get back into those mid to high $0.40 bottom line.

Mark J. T. Thompson -- President, Chief Executive Officer and Director

May not.

Douglas Middleton Arthur -- Huber Research Partners -- Analyst

Okay. And then, Meredith, to your point on the tough comps. I mean on digital advertising you're going up against a 32% growth comp in the fourth quarter. That's 32 against an adjusted taking the extra week out of 17. So is it reasonable based on your sort of second half guidance that we could be down double digit in digital ad in the fourth quarter?

Meredith A. Kopit Levien -- Executive Vice President and Chief Operating Officer

I think Roland's already given the guidance. Sorry. Yeah, I don't think we were guiding past for the third quarter.

Douglas Middleton Arthur -- Huber Research Partners -- Analyst

Okay and then just finally, just to clarify or I don't know if you can clarify, but as you anniversary these one-week price promotions, I mean what are you intending to take them to full price or is it to be determined or any kind of guidance on that?

Meredith A. Kopit Levien -- Executive Vice President and Chief Operating Officer

What our history suggests is that we'll be able to move a lot of them to full price. We, as I said, in response to a related question, we're also operationally prepared to make step up offers as necessary. And that's been how we've managed through these moments previously. So I think that probably answers it.

Douglas Middleton Arthur -- Huber Research Partners -- Analyst

Okay, got it. Thank you.

Operator

Your next question comes from Kannan Venkateshwar with Barclays. Please go ahead.

Kannan Venkateshwar -- Barclays Bank PLC -- Analyst

Thank you. A few. I guess first on the ARPU side, I guess, Roland. You mentioned that we might see the pressure in the second half of the year as well and you will have easier comps or I guess from an ARPU perspective your promotion started Q3 of last year. So when you think about ARPU pressure in the second half of this year as people do step up, we would expect the cadence to change in the opposite direction so just wanted to understand what the thinking is there on the ARPU side of it. Secondly, on the subscriber growth side, over the last four quarters, your second derivative has accelerated. So year-over-year, the number of subs you're adding has accelerated. But as you go into Q3 and Q4. You do have these tougher comps coming in. So is it fair to say that given your retention rates in Europe and some of these other promotion that you run in the past, the trend lines seen over the last four quarters that may not be fair to extrapolate going forward. Thanks.

Roland A. Caputo -- Executive Vice President and Chief Financial Officer

Okay. On the ARPU question. So just to kind of level set here and we are happy with the way the $1 a week promotion has been working both on the starts and retention side as we've discussed. So as that large -- continuing large number of subs come on at $1 a week. Right. That's going to overwhelm the number stepping up, that said in terms of the trajectory of that over the next several quarters, we could expect the downward pressure on ARPU to start to moderate, because we're going to have large numbers of folks stepping up either directly to full price in one shot or stepping up to something between their current promotion and full price. So we'll see -- we'll see the pressure. We'll see downward pressure continue because we aim to continue to bring on large numbers of subs, but that the quarter-to-quarter sequential numbers should moderate. So the drops should get less.

Meredith A. Kopit Levien -- Executive Vice President and Chief Operating Officer

Yeah. And I think I'll take the second question, and I'll just say broadly that I think quarter-over-quarter or understanding of the drivers of the business. What makes someone form a habit and pay and stay is getting better and Mark alluded to this in his remarks, I think we are also getting sequentially better and intervening to move those drivers and there are three places kind of three ways to think about that. One is on the customer journey and we are -- as Mark said in a position now to run many more tests on sort of everything about friction and value exchange in that journey and where do you intervene at what meter count? How do you message? What offer do you show people? I think we're also getting better sort of quarter-over-quarter at optimizing every part of the conversion funnel. So from the time, we show something in the offer until they get to a "thank you" event. We've done a lot of work to optimize along that funnel and there are still more room to go and then I would say the same about retention and on retention specifically, I think we've been very, very good managing the mechanic of retention better. So, things like [Indecipherable] and the involuntary churn and how we message through those moments and intervene. What we still have a lot of room to get a lot better at is engaging people from the moment they subscribe and getting them to form a habit and sort of behave virtuously by signing up for newsletters and downloading the app and registering and logging in, and all of that has real room for us. So I guess my broad answer to you is, I still think there is a fair amount of room in the model for acceleration and I would see it as I was just getting generally better over time as opposed to a discontinuous moment.

Kannan Venkateshwar -- Barclays Bank PLC -- Analyst

Okay. Can I ask one follow-up question Meredith on in terms of the marketing and advertising budgets, when you think about the framework broadly we've seen digital businesses say Spotify and so on. I mean, when we look at their marketing budgets as a proportion of revenues, it tends to be more in the 12% to 15% range depending on who you are looking at, I think New York Times runs it more at roughly about 8% if I'm not wrong. And so when you think about the framework for what your marketing budget looks like over time, is that a framework, we should be thinking about, which is normalizing it as a proportion of revenues how you're thinking about that evolution over time. Thanks.

Meredith A. Kopit Levien -- Executive Vice President and Chief Operating Officer

I would say two things about it and then Roland should add anything I have missed. Our stated strategy is investing in the product itself to be a better engine of what drives growth in the business and by that we mean both the journalism and the kind of combination of user experiencing customer journey and we've talked about that at some length. Over time, and I mean over a long haul you imagine that make your marketing more efficient. So you can spend more to drive more growth or ultimately you may spend differently or less, the thing we've been able to do so far, which has worked very well for us is to really shift the marketing mix. So in the time that I've been here, I think we've come close to tripling what we spend on marketing and go on from spending a 100% of those dollars on performance marketing in direct response to nearly half and in some cases, more than half on things that move sentiment or get people to sort of think or connect differently to The Times emotionally. And I think that what I've just described. I would say is a longer-term debt and one that I think pays off over a longer period of time.

Roland A. Caputo -- Executive Vice President and Chief Financial Officer

I mean, I would just add over the long term. We would like to see the LTV to CAC ratio move up consistently not in any drastic fashion. So if you kind of translate to how that plays out represented as a marketing expense to revenue percentage you would not expect us to drive that percentage up in the future.

All right. Yeah. And if I can just add that we're taking very quite a broad view about how we get the message out of The Times and I, although it's fundamentally a journalistic project, I would say that the Daily which is intrinsically cash positive. It generates revenue in its own right [Indecipherable] and is indeed is has got a very good -- gross margin attached to it. It is a fabulous way of telling the story of the times we do indeed inside the daily often mentioned the opportunity to subscribe to The New York Times. So the -- what we're doing in podcast in what we're doing in television are also intended and indeed the return to brand marketing for The Times, is in turn is intended to at the very, very top of the funnel to get new audiences engaged in journalism, understanding the brand and getting ready for if you like the tactics we can you further down the funnel and ultimately the conversion tactics.

I mean I think our strategy, which is investing very heavily in content. First and foremost, above all in journalism and an improving the way in which our product engages and brings people back again and again in a given week, is new to us at the end of it, if we can efficiently with economic efficiently we can spend continue to spend money actually at the conversion stage, I would say, as long as it makes economic sense we should spend as much as we can. And generally, I think the high numbers out of marketing we associate with very big, we periods where there's a lot of demand for the products.

Kannan Venkateshwar -- Barclays Bank PLC -- Analyst

All right. Thank you.

Operator

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

Craig Anthony Huber -- Huber Research Partners -- Analyst

Yes, hi there. I have a few questions one, your cost growth outlook for the third quarter here up high-single digits. If I heard you right, I think you were saying that marketing costs in the third quarter should not be up, overly significant number year-over-year even sequentially. If that is the case, can you just help us understand better, what is driving the cost growth of high single digits in the third quarter. Thank you.

Roland A. Caputo -- Executive Vice President and Chief Financial Officer

So first, the first thing you have is a full quarter of The Weekly, right. So we had a partial quarter of The Weekly in Q2, so that's a large driver and the other really is investing in the two other components of our growth strategy for digital subs and that's content and product and technology.

Craig Anthony Huber -- Huber Research Partners -- Analyst

Okay. And then also, I just wanted to better understand, it seems like you as are get more and more efficient. I guess, or is it just timing in terms of the marketing spend, you're in second and third quarter. In other words, you're not spending up dramatically year-over-year. Is it kind of what you were hinting that are saying that it was sort of a slower growth of digital subs. We're not going to spend overly aggressive you've marketing here, but in a period of the cycle, we get into more of the political season here, that's when you expect the Morgan Stanley pick up significantly.

Mark J. T. Thompson -- President, Chief Executive Officer and Director

So I'm going to hand it's a marathon a moment, but I just one point I want to make is, we govern our direct spend based on internal rate of return. So when there is demand and we can spend wisely and spend dollars, we're going to get a sufficient return on we will spend them. So that can vary quarter-to-quarter and does vary quarter-to-quarter, but from a bigger picture perspective I'll pass to Meredith.

Meredith A. Kopit Levien -- Executive Vice President and Chief Operating Officer

Yeah. And I'll just kind of reiterate some of the things I've already said. I mean we've got a stated strategy of making the product itself, which is the combination of journalism, user experience in customer journey, a better engine of the stuff that of growth of the things that make people engage and pay and ultimately stay a subscriber and advocate to others.

And I think you saw some of that in the second quarter. I think we -- we see a real opportunity in the market. I think we have real running room to do better on what I just described and to get more out of the model based on I just described. I don't think that obviates the need for marketing and I think we've just described sort of it can allow us in some cases to shift the mix and put more of our marketing dollars to work for more long-term effort to move sentiment and to make our way into people's lives. We're not already in, but it's the more start and retention that we can drive organically through our own product, the better.

And just going back to your question and I think the previous one, one of the unique things about the Times and news as a digital subscription business. But I think it's different from music and entertainment is we have 150 million people who are engaging with our products at any moment and only 4.7 million, who are paying us, so that there is a chain audience of people who are already coming to us in some way organically in a lot of what we're describing is making the most of that audience.

Craig Anthony Huber -- Huber Research Partners -- Analyst

Then also Mark, if I could ask you can you be more specific on where you're investing that for content journalism, both in the US and outside the US, where was those dollars going toward?

Mark J. T. Thompson -- President, Chief Executive Officer and Director

Sure. And I want to say that these decisions are not taken. We absolutely make investment available to the newsroom the decision taken by the newsroom itself and by the public strategy cells. But I would say current focuses have been on building further our capabilities and investing in the journalism, in investing more in tech coverage and that's globally in particular trying to make sure that we cover the way in which techies in Asia is becoming geopolitically and economically incredibly significant force, those will be examples, we're obviously going to be investing into the political cycle as we head toward the 2020 election period.

We are looking hard at ways in which we can -- we're also investing more in climate coverage and doing I think probably more common stores and I think pretty much any other news organization on the planet at the moment. We're also looking for ways we've talked about this previously in earnings calls of building out our podcast and capability and for further opportunities in television and film.

Craig Anthony Huber -- Huber Research Partners -- Analyst

And my last question Mark. Given the ongoing demise of the smaller size newspapers out there and you've now sort of connect the new media emerging talking about $300 million of cost cutting for some of that good chunk that's come at the expense of journalism. At the end of the day, doesn't this all sort of make The New York Times much more of a major source of news in the US is that then there was just no work to your benefit is the last man standing almost in the industries?

Mark J. T. Thompson -- President, Chief Executive Officer and Director

Well, I mean you know and understand the longer, I mean we want to -- I want to say, first and foremost, but we love competition. And we think the plurality in journalism is very important and we are dismayed by the tribulations of the broader news business in America and indeed throughout the developed world. We think that's a bad thing, what is true is that we've got a model where we've been investing in journalism, we have more journalist in our newsroom than we've ever had and will have still more to high this year by the end of this year we'll have something like 1,750 people involved in journalism in The New York Times, by far the biggest in our history.

And as I've said before we take the same view about content that Reed Hastings and Netflix do which is if you won't be able to pay for great content, you need to invest in the content. So it's there for them to bond and delight. If we can help other news organizations with our expertise and with partnership we'll do that. And we're looking at ways in which we could potentially do that, but we do have a thesis that America and the world is crying out to high quality journalism, delivered effectively in engaging an attractive digital products and monetize significantly through subscription.

That's all thesis where we determined to go and investing in it.

Craig Anthony Huber -- Huber Research Partners -- Analyst

Mark my last quick question. At 1,750 number of total people involved in journalism today what was that number when you started the company five plus years ago. Thank you very much.

Mark J. T. Thompson -- President, Chief Executive Officer and Director

I haven't got an exact number for you, but 100s fewer we're very substantially larger than we were. And we, as I said at the start of my remarks. We attribute the success of the, The Times in building out its digital subscription business, very significantly to the investment and the focus that we put on journalism, we think many news organizations, have some [Indecipherable]. I to go things too through cost cutting and reducing their newsrooms. We think exactly the opposite that to get a great journalism business to work you have to invest in great journalism.

Craig Anthony Huber -- Huber Research Partners -- Analyst

Great, thank you.

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 -- Executive Director of Investor Relations and Financial Planning and Analysis

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

Operator

[Operator Closing Remarks].

Duration: 47 minutes

Call participants:

Harlan Toplitzky -- Executive Director of Investor Relations and Financial Planning and Analysis

Mark J. T. Thompson -- President, Chief Executive Officer and Director

Roland A. Caputo -- Executive Vice President and Chief Financial Officer

Meredith A. Kopit Levien -- Executive Vice President and Chief Operating Officer

John Thomas Belton -- Evercore ISI Institutional Equities -- Analyst

Alexia Skouras Quadrani -- JP Morgan Chase & Co -- Analyst

Vasily Karasyov -- Cannonball Research -- Analyst

Douglas Middleton Arthur -- Huber Research Partners -- Analyst

Kannan Venkateshwar -- Barclays Bank PLC -- Analyst

Craig Anthony Huber -- Huber Research Partners -- Analyst

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