The New York Times Company (NYSE:NYT) Q3 2023 Earnings Call Transcript
The New York Times Company (NYSE:NYT) Q3 2023 Earnings Call Transcript November 8, 2023
The New York Times Company beats earnings expectations. Reported EPS is $0.37, expectations were $0.29.
Operator: Good morning, and welcome to The New York Times Company's Third Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Anthony DiClemente, Senior Vice President of Investor Relations. Please go ahead.
Anthony DiClemente: Thank you, and welcome to The New York Times Company's third quarter 2023 earnings conference call. On the call today, we have Meredith Kopit Levien, President and Chief Executive Officer; and Will Bardeen, Executive Vice President and Chief Financial Officer. Before we begin, I'd 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'll turn the call over to Meredith.
Meredith Kopit Levien: Thanks, Anthony, and good morning, everyone. Let me begin by noting this is a deeply troubling and complex period for the world, with last month's horrific attack on Israel by Hamas, the ensuing war and devastation in Gaza, and the reverberating global consequences. In this difficult moment, The Times plays a vital role. With a century of expertise covering the region, our newsroom has dozens of journalists on the ground and many more around the globe, doing the essential work of original reporting and analysis to eliminate and contextualize these events, just as they have been doing for more than a year and a half on the war in Ukraine. Our mission, to seek the truth and help people understand the world, propels our business strategy.
That strategy is to become the essential subscription for every curious English-speaking person seeking to understand and engage with the world. Our strong results in the third quarter underscore that our strategy is working as designed. Being essential means creating news coverage and lifestyle products that are sufficiently valuable, they drive audiences to seek us out directly and build enduring daily habits. We believe our best opportunity to build direct lifelong relationships is when people experience the full breadth and variety of our product portfolio packaged as a bundle. That bundle fuels our growth and our economic success in several ways. First, our multiple products give us complementary audience funnel, each with the opportunity to meaningfully expand our reach.
Second, we see better conversion of new users to paying subscribers as our varied product portfolio captures demand for a wide range of audience interest. Third, people who subscribe to our bundle engage and retain better as the bundle creates more opportunities for them to discover and enjoy our products. And fourth, we are achieving better monetization of our engaged audiences as the full bundle enhances value for subscribers, advertisers, and licensees. For all these reasons, our essential subscription strategy continues to perform well, and we surpassed 10 million subscribers this quarter. That base of engaged subscribers gives us a large recurring revenue stream, powers our revenue streams beyond subscriptions, and enables continued investment into our competitive advantages, world-class journalism, premium lifestyle products, and the technology that underpins them.
This, in turn, enables further growth and value creation. Indeed, we expect the quality and comprehensiveness of our news coverage and the scale and distinctiveness of our lifestyle products to fuel our progress toward our next milestone of 15 million subscribers. Importantly, we expect at least half of our subscribers over the next few years to be on the bundle. That matters because bundled subscribers engage more, stay longer and monetize better than subscribers to any individual product, thereby improving our unit economics and advancing our efforts to build a larger and more profitable company. I'll turn now to the major contributors to our third quarter results. This quarter, we met or beat quarterly guidance on subscription revenues, advertising revenues and adjusted operating costs.
We added 210,000 net new digital subscribers in the quarter, and the bundle played an outsized role. It was the preferred choice for new subscribers by a wide margin and set another record in its share of overall starts. We achieved that strong net ads growth even as platforms sent fewer casual newsreaders to us and other publishers. We see our continued subscription growth in this environment as evidence that our investments in news and our wider product portfolio are paying off and that our strategy is building resilience. We also saw clear evidence that our non-news funnels are increasingly effective as on-ramps to the bundle. In Games, our homegrown hit connections is now played by over 10 million users a week, another proof point for the scale of our opportunity in that space.
And we grew The Athletic audience again in the quarter, reinforcing our conviction in the very big potential we see in sports. New York Times subscriber engagement hit its highest level in the quarter in nearly three years as measured by the percent of subscribers on our sites or apps each week. This is a testament to the depth and breadth of our news coverage as well as the ability of our product portfolio to meet different complementary needs. We are steadily improving the monetization of our products with consolidated digital subscriber ARPU growing year-on-year for the second quarter in a row as well as quarter-on-quarter. I'll note that in Q3, we saw the largest ever volume of bundled subscribers graduate from promotional to higher prices.
We are encouraged by the retention and monetization signals we are seeing among those cohorts, though it is still early days. Total advertising revenue grew 6% in the quarter, anchored by three strengths that we believe give us long-term advantage, despite near-term ad market headwinds. Those strengths are: one, our high-performing premium display canvasses and first-party data products, both of which are unique to The Times and emanate from the quality of our environment and scale of user engagement. Two, the fact that we are now extending our ad products across the bundle to attract new advertisers and categories. We are just getting started here and seeing particular success with The Athletic, which grew ad revenue more than threefold in the quarter.
And three, our brand's enduring appeal for the world's top marketers who can reach our big and influential audiences through multiple channels across our platforms. The overall advertising results in the quarter also benefited from better-than-expected resiliency in print, which we nevertheless expect to decline over time. On the cost side, we continue to actively manage our expenses. This cost discipline supports our ability to keep growing AOP and free cash flow, which we did again in Q3 even as we continued investing into our strategy. I'll wrap by noting that the successful execution of our strategy reinforces our confidence in the path ahead. Our journalism and lifestyle products have made us the category leader in subscription journalism by a wide margin.
Our essential subscription strategy is delivering steadily improving unit economics. And with this foundation and against the backdrop of an ever-changing information ecosystem, we believe strongly in our ability to achieve our financial goals and build a larger and more profitable company. Now let me turn it over to Will for more details on the quarter.
William Bardeen: Thanks, Meredith, and good morning, everyone. Our essential subscription strategy is designed to do more than increased customer value and fuel growth. As Meredith just described, our bundle of market-leading news and lifestyle products is also designed to improve our digital unit economics and company profitability in a few ways. First, we plan to increase our subscriber lifetime value over time because of the bundle strong engagement, retention and ARPU potential. Second, we expect to sustain attractive subscriber acquisition costs as the bundle converts organic demand for multiple areas of audience interest. And third, we expect strong engagement with our scaled subscriber base will fuel the growth of our additional advertising affiliate and licensing revenue streams.
We see these improving digital unit economics reflected in our financial results. Steady revenue growth and disciplined cost management have been driving continued AOP growth and margin expansion. Today, I'll discuss the quarter's key results, followed by our financial outlook for next quarter. Please note that all comparisons are to the prior year period unless otherwise specified. I'll start with a discussion of our subscription business. We added approximately 210,000 net new digital subscribers in the quarter, largely driven by strong performance in bundle and multi-product subscriber additions. We added more than 3x as many bundle and multi-product subscribers as we did in the same period last year. They now make up 38% of our total base, well along the path to exceeding 50% over the next few years.
Total digital-only ARPU grew steadily for another quarter to $9.28, up approximately 5% year-over-year and 1.4% quarter-over-quarter. Our continued sequential digital-only ARPU growth was driven by our success with graduating subscribers from promotional to higher prices, as well as the ongoing impact of our digital price increase on tenured non-bundled subscribers. We continue to be pleased with the results of the digital price increase rollout. And as Meredith noted, we transitioned to greater number of bundled subscribers from promotional to higher prices in Q3 than in prior quarters. While it is still relatively early, we are encouraged by the signals that bundle subscribers retain and monetize better than news-only subscribers as we step them up to higher prices.
As a result of the growth in both subscribers and digital-only ARPU in the third quarter, digital-only subscription revenues grew 16% to $282 million. Total subscription revenues grew approximately 9% to $419 million. Now turning to advertising. Total advertising revenues for the quarter were $117 million, coming in above expectations, with growth of 6% compared to our guidance of approximately flat. The outperformance was primarily driven by better-than-expected results from print advertising, which was up approximately 5%. Digital advertising came in towards the high end of our expectations in the quarter, growing approximately 7% to $75 million. This growth was driven by strong performance at both The New York Times Group and at The Athletic for our core premium display and first-party data product offerings.
The strength in these products helped more than offset softer results from podcast advertising, where we continue to see headwinds. Other revenue grew in line with our guidance, increasing approximately 15% to $63 million. Wirecutter affiliate revenue and licensing continued to be strong contributors to year-over-year growth. Moving now to costs and the progress we are making in driving AOP growth and free cash flow growth. We continued to demonstrate cost discipline this quarter, along with the strategic approach to areas of ongoing investments. Adjusted operating cost growth was in line with our expectations, increasing approximately 6%. Growth was driven in large part by our continued investments in journalism and product development. The strategic investments we've made in these areas have enabled us to improve our operating leverage by broadening our addressable market and fueling organic subscriber growth.
Sales and marketing costs were down approximately 3%, reflecting our ability to continue leveraging our journalism and product investments to acquire the majority of our new subscribers organically and improve the effectiveness of our overall sales and marketing spend. We saw improved marketing efficiencies in the quarter, in part due to a simplification of our media programs, which have consolidated much of our media spend to focus on the bundle. The increase in our general and administrative cost growth was due principally to higher compensation and severance expenses and certain one-time items. It's worth noting that we don't believe Q3's higher level of growth to be representative of future G&A growth. As a result of strong revenue growth and disciplined cost management, adjusted operating profit grew 30% to $90 million.
Adjusted operating profit margin was 15% in the quarter, an increase of approximately 240 basis points compared to the prior year. We view these results as a testament to our strategy's ability to drive AOP growth and margin expansion over time. This also translated into strong earnings growth as adjusted diluted earnings per share increased $0.13 to $0.37. EPS growth was also aided by higher interest income on our cash and marketable securities and a favorable effective tax rate. As of the third quarter end, the company has generated approximately $208 million of free cash flow year-to-date, demonstrating the strong cash generation of our model. Turning to capital allocation. I want to take this opportunity in my first full quarter as CFO to restate our capital allocation priorities, which remain unchanged: first, to organically reinvest into the growth of our essential subscription strategy in ways that drive value creation and extend our long-term competitive advantage.
Second, to return excess capital to shareholders in the form of dividends and share repurchases. And third, to maintain the flexibility to consider targeted strategic acquisitions that can accelerate our strategy should we see a high return opportunity. We continue to have a balanced approach to capital returns with a target of returning at least 50% of free cash flow over the mid-term. Year-to-date, as of November 3, we have returned approximately $114 million through a combination of $69 million in dividends and $45 million in stock repurchases. I'll now look ahead to Q4 for the consolidated New York Times Company. Before I do, I would like to note that we have updated our presentation of total operating costs to include special items, which are items that are outside the ordinary course of our operations.
As a result of this change, we will no longer provide quarterly guidance for total operating costs due to the inherent difficulty in forecasting these special items. We will continue to provide guidance for adjusted operating costs. And as a reminder, due to a change in the company's fiscal calendar, the fourth quarter of 2022 included an additional six days of revenue and costs compared to the fourth quarter of 2023. In order to provide clarity around our outlook, we have provided fourth quarter 2023 revenue guidance on both a reported basis and an adjusted basis, which excludes the additional six days of revenue from 2022 in the year-over-year comparison. The full details of our fourth quarter guidance can be found on Page 9 of our earnings release.
On an adjusted basis, total subscription revenues are expected to increase 8% to 11% compared with the fourth quarter of 2022. And digital-only subscription revenues are expected to increase approximately 13% to 16%. Overall advertising revenues are expected to range from a decrease of low-single digits to an increase of mid-single digits, while digital advertising revenues are expected to increase low to high-single digits. These ranges reflect the ongoing low visibility we are seeing in the advertising market. Other revenues are expected to increase low to mid-single digits. On a reported basis, adjusted operating costs are expected to be in the range of flat to up 2%. With more than half of the year behind us, we believe we are on track for the modest margin expansion we've been aiming to deliver beginning this year.
And with that, I'll send it back to Meredith to wrap up.
Meredith Kopit Levien: Thanks, Will. In closing, this quarter's results are further proof that our essential subscription strategy is working. Our unrivaled journalism and market-leading lifestyle products give people many reasons to seek us out at different moments. We believe integrating these products into a single bundled offering increases the value we deliver to customers who deepen their engagement and willingness to pay more over time. And our multi-product multi-revenue stream model makes us more resilient in the face of an uncertain economy and world and an ever-changing information ecosystem. All of which means that we are well positioned to continue creating value for our readers, for our colleagues, and for our shareholders. And with that, we would be happy to take your questions.
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