New York Times Company (The)

Good morning, and welcome to the New York Times fourth quarter and full year 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Harlan Toplitsky, Vice President of Investor Relations. Please go ahead.

Thank you, and welcome to the New York Times Company's fourth quarter and full year 2022 earnings conference call. On the call today, we have Meredith Kopit-Levian, 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 2021 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 Kovet-Levien.

Thanks, Harlan, and good morning, everyone. 2022 was the first full year of executing our strategy to become the essential subscription for every curious English-speaking person seeking to understand and engage with the world. We're proud of our results, which reflect the differential value of our expanded product portfolio, the multi-revenue stream nature of our model, strong unit economics, and disciplined cost management. I'll start by sharing a few highlights from the year. Consolidated adjusted operating profit was $348 million, well ahead of our guidance and an increase over 2021. At the New York Times Group, we grew adjusted operating profit by 14% and drove more than 100 basis point improvement in margins. Notably, that margin improvement follows a 200 basis point improvement in 2021 and reflects palpable progress on our journey to building a larger and more profitable company. Moreover, these results demonstrate the proven nature of our model to grow profit, even in a dynamic and challenging market. They also give us the confidence to announce a new midterm target for capital return, a new share repurchase authorization, and our fifth consecutive annual increase to the quarterly dividend payment. We recorded just over 1 million net digital subscriber additions for the year, our second best year ever for net ads behind only our blockbuster 2020. We ended 2022 with 9.6 million total subscribers, including print. We achieved that result despite contending with many of the same pressures impacting others in the digital subscription industry at the moment. With each passing quarter in 2022, we saw increasing proof that there is strong demand for a bundle of our news and lifestyle products. Both the total volume of new bundle subscribers and the share of new subscribers choosing the bundle grew significantly over the course of the year. We reached record highs on both metrics by year end with more than 30% of new subscribers taking the bundle. That's roughly six times more than in the prior year. The bundle proved successful in international markets as well, where it accounted for over 25% of digital starts by year end. The higher engagement we see among bundle subscribers has sustained even as we've increased its uptake at roughly 10 to 20 percentage points more than news only subscribers on a weekly basis. That's been aided by our efforts to help those subscribers discover and enjoy offerings from across our portfolio, such as highlighting games like Spelling Bee in our news app. And given the strong relationship we've seen between subscriber engagement and retention, we expect the shift toward the bundle to yield benefits that continue accruing well into the future. We recently passed the one-year anniversary of our acquisition of The Athletic, We finished the year ahead of our expectations for The Athletic, outperforming the adjusted operating profit assumptions we shared at the point of acquisition. We're playing a long game here with ambitions to become a global leader in sports journalism. To that end, our focus continues to be on building engagement for The Athletic as part of the time's bundle, significantly widening its audience funnel by further opening up its hard paywalls and increasing overall awareness for the athletics journalism. We also finished our first full year with the hit game Wordle, which continues to delight tens of millions of players each week and contribute substantially to our ability to engage people and introduce them to other times products and games. And on a full year basis, advertising performed relatively well in an increasingly difficult market. New York Times Group advertising revenue grew 3%, with strong results in print offsetting a slight drop in digital revenue. Our early efforts to build a broader ad business on The Athletic are also showing promise. I'll turn now to the results of the quarter. In Q4, we added 240,000 net digital subscribers, roughly on par with the prior year, but as noted, with a much higher share going to the bundle. Digital subscriber revenue in the quarter grew in line with our expectations, driven mostly by the continued transition of early tenured subscribers to higher prices. Including the athletic, consolidated digital ARPU grew sequentially for the second consecutive quarter. We expect that positive ARPU trend to continue throughout 2023 as more subscribers transition to paying higher prices. Advertising revenues exceeded our expectations in the quarter in both digital and print, demonstrating the enduring value of our first-party data and premium ad products and the appeal of the Times brand to a wide range of marketers, even in a challenging macroeconomic environment. Print advertising, which we still expect to decline over the long term, was notably resilient in Q4. Our fourth quarter results also underscore the power and benefit of having diverse sources of revenue, even beyond subscriptions and advertising, as we enjoyed a record quarter for affiliate revenue to Wirecutter, driven by a highly successful holiday shopping season. And we signed a multi-year commercial agreement with Google at the end of the year, which stretches across many facets of our business, including content distribution, marketing, and product experimentation. We'll begin to see the financial benefit from this deal starting in 2023. I'll turn now to expenses in the fourth quarter. Over the last year, we've talked about being ready to begin leveraging the investments we've been making for years in our journalism and digital product experiences, and as a result, slow cost growth. We've done so now for the second quarter in a row. As with the third quarter, this was largely the result of two factors. First, we've become more effective at driving subscription growth through our organic audience engine and digital product work, allowing us to substantially reduce marketing spend. Second, while we continue to invest thoughtfully in areas that widen our moat, including our newsroom, engineering, and data teams, we've slowed headcount growth in most other areas across the company. We also reduced headcount in a few areas where we believed we could do so without affecting our growth strategies. Our strategic clarity and strong execution give us confidence that we can continue to manage costs well going forward. I'll close by looking ahead to 2023 and beyond. We are entering the year with meaningful momentum toward our goal of 15 million subscribers by year-end 2027. While our path to getting there is unlikely to be linear, we have deep conviction in our market opportunity and our ability to create shareholder value. There remains much uncertainty in the current environment, including macroeconomic pressure on advertising, shifting traffic patterns from the tech platforms, and a more varied news cycle. But we've shown that we have the strategy and executional ability to manage through short-term challenges and emerge stronger. To that end, in 2023, we'll lean further into two big areas intended to press our advantage. First, we are especially focused on growing audience share and widening our pools of high-quality prospects in news and across our expanded product portfolio and bundles, which we expect will drive subscriber growth over time. Second, We are intently focused on increasing ARPU through continued success at transitioning subscribers from promotions to full price, driving bundle uptake, and experimenting with price increases on individual products for tenured subscribers. I've already indicated our progress on the first two, and I'll note that we like what we see so far on our individual product price increase text. Now, let me set this all in context. Last June, we noted that the midterm profit target we shared was influenced by several potential headwinds. Those headwinds have largely materialized as we anticipated. Even still, we beat our adjusted operating profit expectation for 2022, which, as you'll recall, represents the base year for that profit target. Building on that higher base, we are aggressively focused on capturing tailwinds and seizing every opportunity to drive strong performance. Now, before I turn it over to Roland, I want to say a few words about my two colleagues on this call. This is the last time you'll hear formally in this setting from Harlan Toplitsky, who has served ably as head of investor relations for The Times for the last six years. I'm grateful to Harlan for his tireless work and commitment to our mission and business, and I wish him well in his next professional adventure as he and his family settle into a new life on the West Coast. And I want to acknowledge the announcement we made just before the year turned, that my friend and longtime Times colleague, Roland, will retire mid-year. We'll have plenty of time to send Roland off properly. In the meantime, We're working closely together to position us well for the arrival of our next CFO, a search for whom is well underway. With that, I'll hand it over to Roland and be back to take your questions shortly.

Thank you, Meredith, and good morning. As Meredith said, we're very pleased with the fourth quarter results we're reporting today. We're reporting $348 million in adjusted operating profit for the year, an increase of $13 million versus last year. This means annual growth at the New York Times Group more than offset the losses at The Athletic. Turning to the quarter, adjusted diluted earnings per share was 59 cents, 16 cents better than the prior year. It's worth noting that we've modified the definition of adjusted diluted EPS to exclude the impact of amortization of acquired intangible assets to improve the comparability of earnings across periods. This adjustment was 4 cents per share in the quarter and 16 cents for the full year. We reported adjusted operating profit of $142 million in the quarter, higher than the same period in 2021 by over $32 million. Adjusted operating profit at the New York Times Group was approximately $149 million, an increase of $40 million compared to the prior year, while The Athletic had adjusted operating losses of approximately $7 million. In the fourth quarter, the company added 240,000 net new digital-only subscribers and 240,000 net new digital-only subscriptions with, as Meredith noted, continued strong growth in adoption of our bundled product. The number of digital-only bundle and multi-product subscribers grew by approximately 380,000 in the quarter, driven mainly by increases to the number of new bundle subscribers augmented by existing subscribers who upgraded to the bundle. Moving to revenues. As a reminder, the company has adopted a change to its fiscal calendar, and as a result, our 2022 fourth quarter and fiscal year included an extra six days as compared with 2021. The earnings release published this morning reports revenues on both a GAAP and estimated 13-week basis. A reconciliation of revenues can be found on page 21 of the earnings release. My comments on revenues today will exclude the estimated impact of the additional six days to provide like-for-like comparisons. However, estimating the cost impact of the extra six days for cost is more difficult and subjective. Total subscription revenues increased approximately 11.5% in the quarter, with digital-only subscription revenue growing nearly 23% to approximately $252 million. Digital-only subscription revenue grew primarily as a result of the large number of subscribers whose introductory promotional subscriptions graduated to higher prices, the new subscriptions we have added in the past year, and the inclusion of subscription revenue from athletic standalone subscriptions. Moving to digital-only subscriber ARPU, which includes all of our digital products. For the quarter, digital-only subscriber ARPU decreased 7% compared to the prior year due to dilution from our early 2022 acquisition of The Athletic. On a sequential basis, digital-only subscriber ARPU increased nearly 70 basis points compared to the prior quarter. Print subscription revenues declined approximately 4%, as the benefit from the first quarter home delivery price increase did not fully offset lower volumes in both home delivery and single copy. Again, excluding the estimated impact of the six days, total advertising revenues decreased almost 2.5% in the quarter. Digital advertising declined approximately 4% as higher direct sold advertising at the New York Times Group and the addition of advertising revenue from The Athletic was more than offset by lower creative services revenue. Meanwhile, print advertising revenue was higher by more than one half of a percent compared with 2021, primarily driven by growth in the luxury category. On a gap basis, which includes the impact of the additional six days, both digital and print advertising revenues beat the fourth quarter guidance we issued in the third quarter. Digital advertising exceeded guidance as a result of better than expected performance in programmatic advertising, and also in direct sold advertising from the advocacy and entertainment categories. Print also exceeded our expectations, largely from the luxury and entertainment categories. Other revenues increased approximately 9.5% compared with the prior year to approximately $72 million, primarily as a result of higher Wirecutter affiliate revenue, higher live event revenue, and higher licensing revenue, despite the expiration of the Facebook licensing agreement. All of this was partially offset by lower television revenues. Other revenue outperformed guidance due to better than expected results from Wirecutter affiliate revenues, which grew by more than 20% in the quarter. Inclusive of the extra six days, adjusted operating costs were higher in the quarter by approximately 8.5% as compared with 2021, primarily due to the addition of costs associated with the athletic, while costs at the New York Times Group were approximately 1% higher. These results were consistent with guidance and our plan to slow cost growth in the back half of the year. I'll now discuss the cost drivers for the New York Times Group. Cost of revenue increased approximately 11% as a result of the impact from the additional six days in the quarter, growth in the number of employees who work in the newsroom, and higher print raw material costs. Sales and marketing costs decreased approximately 45%, largely due to lower media expenses. Media expenses were $22 million, approximately two-thirds below last year, which was a period of elevated marketing spend. Product development costs increased approximately 22% as a result of growth in the number of digital product development employees in connection with expanding and improving our digital product portfolio. And general and administrative costs were higher by approximately 11% due to an increase in the number of employees needed to support the growth in our business over the last several years, higher enterprise technology costs, and one-time building maintenance costs partially offset by a lower incentive compensation accrual as compared with last year. We had two special items in the quarter. a $22.1 million charge in connection with the company's withdrawal from a multi-employer pension plan, and a roughly $4 million impairment of an intangible asset. Our effective tax rate for the fourth quarter was approximately 25% versus an expected marginal rate of 27%. Our qualified pension plans ended the year 106% funded with an approximate $70 million surplus. This is largely consistent with the 105% funded status we reported at year-end 2021, a strong result in light of the general market performance in 2022. Moving to the balance sheet, our cash and marketable securities balance ended the quarter at approximately $486 million, an increase of approximately $17 million compared with the third quarter of 2022. The company remains debt-free with a $350 million revolving line of credit available. It's worth noting that our 2022 cash generation was adversely affected by the change in the tax deductibility of research and development expenditures. We estimate that this resulted in approximately $60 million in lower cash flows this past year. We expect to recapture the value of these deductions over the next five years. Share repurchases during the fourth quarter totaled approximately $25 million, and the company continued to purchase shares subsequent to the end of the quarter. As Meredith noted, given the continued strength of our balance sheet and the confidence we have in the cash generative nature of our business model, we're updating the midterm capital return target of 25 to 50% of free cash flow announced at our June investor day. We now aim to return at least 50% of free cash flow to our shareholders, which will allow us to return more capital to shareholders while maintaining the strategic flexibility to continue to invest thoughtfully in the business. In light of this updated capital return target, the Board of Directors has approved both a $0.02 increase to our quarterly dividend to $0.11 per share and a $250 million share repurchase authorization, which is in addition to the nearly $40 million remaining under our existing authorization. Let me conclude with our outlook for the first quarter of 2023 for the consolidated New York Times. This represents a change in practice from the last three quarterly calls in which I provided guidance to the New York Times Group only. We are making this change now to correspond with our lapping of the acquisition of The Athletic in the first quarter of 2022. As a reminder, the company acquired The Athletic on February 1st, 2022, and as a result, The Athletic's first quarter 2022 result reflects approximately two months of the quarter. Total subscription revenues are expected to increase 6 to 9% compared with the first quarter of 2022, with digital-only subscription revenue expected to increase approximately 13 to 16%. Both overall and digital advertising revenues are expected to decrease in the low single digits compared with the first quarter of 2022, mainly due to macroeconomic conditions and the comparison to a strong first quarter in 2022. Other revenues are expected to increase in the mid-single digits. Both operating costs and adjusted operating costs are expected to increase by approximately 6% to 8% compared with the first quarter of 2022. We expect expense growth to slow in the second half of the year compared with this first quarter guidance. And with that, we're happy to take your questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we'll pause momentarily to assemble our roster. Our first question comes from David Karnofsky from J.P. Morgan. Please go ahead.

David Karnofsky. Hi, Barrett. Just on the update to the capital return program, can you maybe discuss a bit the background to revisit this less than a year later? You know, you haven't updated your midterm operating targets, just wanted to better understand you know, what you're seeing in the business that gives you the confidence to kind of increase the allocations to buyback and dividend. And then, Roland, you mentioned just now cost or cost growth dropping sort of in the back half of the year. Not sure if you'd be willing to kind of say if you overall would expect to grow margin in 2023. Thanks. Sure.

I think I can give a short answer, which is just the update on capital return reflects real confidence in our strategy. We had a very strong year. strong first year of execution. We like what we're seeing and we think the model itself is a strong one and a durable one. But Roland, you may add more detail to that.

Well, I mean, I just want to say we're really pleased to increase the return to shareholders at this time. And, you know, we believe that doubling that minimum percentage of free cash flow that we aim to return illustrates, you know, the real confidence in the business and the desire for us to return capital to shareholders. And I guess the last thing I'd say is, Both the dividend increase and the new share purchase authorization at the levels we announced reflect the company's balanced approach to returning capital. David, your second question I think was related to cost but got to margin expansion, I believe. And what I'd like to just say is we aim to modestly increase our margins this year in 2023. Thank you.

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

Yeah, good morning. Two quick things. Meredith, the Athletic did $5.3 million of advertising, according to this table, in the fourth quarter. I realize you had extra days. It's a seasonally strong quarter. But that's, you know, evolving towards a $20 million annual run rate. You have to be somewhat pleased with that. Is that a fair statement?

I'll just say ads are off to a promising start. We're optimistic about the athletic as, you know, as a, as a real driver of advertising. And I, you know, could go on and on, but I'd basically be giving, you know, affirming that we're excited about ads on the athletic and we like what we see so far.

Is there any, can you put any kind of contours around what type of advertising you're, I mean, I'm on the athletic all the time, but I, What type of advertisers you're attracting?

That's a great question. I'd say there are kind of two buckets. One, the Times has a pretty wide base of advertisers, but we get particular campaigns from those advertisers. And one of the things we were really pleased to see in the early days with The Athletic, and I think we launched ads in September, Roland and Harlan are nodding. We had some of the same advertisers to the Times, but giving us different campaigns targeting different people. So that's one. And then two, there's just a whole category of advertisers who spend a lot of money around sports and who the Times doesn't necessarily get. And we think there's real promise there as well. And as you know, we sent you know, our former head of ads from the Times over to The Athletic to build that business. And a couple of folks went with him and, you know, they've built out a team. And I would just say it all feels very promising. I'll give you one more kind of technical detail. The Athletic did have a very small ad business when we acquired it. That was largely an audio business. They have a lot of podcasts. which are great. You should listen to them. And so what we're adding here is a premium display business like the business we have on The Times with great ad canvases. And you can imagine all the things we've done with The Times, including building a rich trove of first-party data and building partnerships with marketers that you know, want to do something kind of more meaningful than just run display, you can imagine we're good at that at the times and we're kind of bringing all that to the athletic.

Great. And then, Roland, just one sort of, you know, contextual question. In terms of this bundled multi-product subscriber number of 2.5 million, is there a way to kind of give some color as to how much of that is print? How much of that comes from the athletic? I mean, how does that number break down in terms of what people are going at?

So first of all, I think last quarter we changed the definition of that to exclude print. So that is exclusive. That 2.5 million is exclusively a digital number. So that's the first thing to level set. You've also got two other categories of subs that we disclose and you'll see how many folks have news in their subscription, how many folks have athletic in their subscription. And you can track those increases as well. So a bundle will count there as well as a standalone. So the majority of the folks in that have at least a news entitlement and obviously they have something else. So that's by far the biggest chunk. And I would just add to that the fastest growing piece of that is the bundle.

Okay. So you used to call it total multi-product subscribers. That included print. You've wiped that out. You've cleaned that up. That's right. We cleaned that up. Okay. All right. Thank you.

Our next question comes from Wasile Karasaya from Cannonball Research. Please go ahead.

Good morning. Meredith, you touched on it in your prepared remarks, but I wanted to ask you to talk in more detail what you're seeing in how your subscribers or trial subscribers behaving in this over the past several quarters that we are going through inflation, you know, recession or whatever we want to call it, you know, macro headwinds and stuff like that. Are you finding any kinds of behavior that are surprising to you and causing you to adjust? your strategies, retention practices, and acquisition strategies. So would appreciate some color on that.

Sure. Good morning and great question. You know, broadly, my answer is we're not seeing much on the subscriber engagement or on the subscriber front that surprised us. Subscriber engagement, which was a huge area of focus in 2022, I think it's gone well. We really like what we see. And I'd say part of why it's gone so well is as we put a lot of energy and resources into deliberate intervention to get people, if they were new subscribers, to experience more. And if they were bundle subscribers or potential bundle subscribers to, you know, to do other things with us. we are building our understanding of, you know, what really drives that additional engagement. If you buy the bundle versus news, I alluded to that in my prepared remarks. And it's, you know, if you engage with a second product, so if you're a new subscriber and you also engage with the athletic, or you also engage with cooking or games, that is a retentive behavior. So we're very focused on driving that. And I would say, put a lot of energy into executing, and that has gone well. I'll add, because I think you're poking at it, you know, we said a year ago at this time, maybe even a little further back, that it was going to be really important to keep churn to a manageable level, and I think we've done that. You know, it will be an ongoing focus given the size of the base now. It's quite important. to the net ads story, but, you know, so far so good. And we, you know, the bundle strategy plays a role in that, but just broadly, I think we have been able to hold churn to a manageable level.

Thank you. Our next question comes from Thomas Yeh from Morgan Stanley. Please go ahead.

Thanks so much. Meredith, you mentioned expectations for a sequential positive digital subscriber ARPU trend to continue throughout 23. Does that include some benefit from these experiments that you cited around individual standalone products and any more color on what you're planning to implement there from a pricing change perspective would be really helpful. And then secondly, just any color on the drivers of the ad trends into 1Q, I think down low single digit seems to be sequentially better than the core trends in 4Q, excluding the extra days? Has the macro pressures that you kind of cited as picking up stayed the same or abated as we headed into the last few months? That'd be great. Thank you.

So I think I can remember all that. So on ARPU, there are a few things at play here. One is we continue to be successful at transitioning subscribers from promotions to interim and full prices. That's going well. And that's obviously a huge part of the model and the story here. And so that's a big driver. That's one. Two, I'll just remind you that the bundle itself at every price point, even on a promotion, is a little more expensive than any individual product on a promotion. And then, of course, over time, the assumption is we're going to transition bundle subscribers to higher prices as well. And that sort of, you know, the pricing power of the bundle versus individual products carries through the transition to full price. So, one, Transition to full price continuing to go well. Two, more bundle uptake has positive effect on ARPU. And then three, to your question, I think you're asking more sharply, yes, we have been in the market since the very end of last year testing price increases to a portion of the population who are tenured subscribers to individual products, so news and the other standalone products. And as I said in the prepared remarks, we like what we see so far. I'll just remind you, we've got experience here. I think I always forget if it was 20 or 21. I think in 2020, we did a major price increase. First one we had done since the pay model launched for tenured news subscribers. And we went about that in a kind of test first, very rigorous way. And it went well. And that's what we're doing here. as well. And all of that should, you know, should play a role in subscriber monetization and ARPU improvement. And that is a real focus for us this year. So I think that's the first question. On ads, look, I think we've got the right strategy in ads. It is a really tough market, complicated market, but, you know, the times benefits from a few things. One, and this goes to Doug's question earlier, with an, you know, better with the athletic, but even before the athletic, we play in a wide range of categories. And I think that helps us, you know, different categories, you know, fare differently in market cycles. For example, luxury was strong in the fourth quarter and, you know, other categories weren't. So in general, the width of our sort of marketer interest for the times, helps us. And then I'm going to keep saying that the basic thing the Times offers, which is a really premium environment with a very strong and growing, powerful body of first-party data that can help marketers target in privacy-forward ways, is really benefiting us. So I think that the strategy and the model are just really enduring in advertising.

Thank you. Our next question comes from Ashton Wells from Evercore ISI. Please go ahead.

Thanks. Quick question on media expenses. I get that they were elevated in 2021 with some elevated marketing spend, but it also seems like they dropped below the 2020-2019 run rate. Should we expect that going forward into 23?

Let me talk a little bit about that. Reducing that marketing spend over time has always been a part of our plan. We've communicated that to the market for quite some time. And as we continue to improve our digital products through the investments we're making in our journalism and in our product development, that's enabling the reduction, has enabled the reduction in that marketing spend. Going forward, I think you can think about it in this vicinity, that, you know, there may be a quarter where we want to spend some brands, so that's always on the table. We did not do that in Q4. But other than that, you can see this as, I think, a pretty typical run rate for the near future. Thank you.

This concludes our question and answer session. I'd like to turn the conference back over to Harlan Toplitsky for any closing remarks.

Thank you for joining us this morning, and the company looks forward to talking to you again next quarter.

The conference has now concluded. Thank you for attending today's presentation. You may now