The New York Times Company Fourth-Quarter 2015 Earnings Conference Call February 4, 2016 Harlan Toplitzky Thank you, and welcome to The New York Times Company s fourth-quarter and full-year 2015 earnings conference call. On the call today, we have: Mark Thompson, president and chief executive officer; Jim Follo, executive vice president and chief financial officer; and Meredith Kopit Levien, executive vice president and chief revenue officer. Before we begin, I would like to remind you that management will make forward-looking statements during the course of this call, and our actual results could differ materially. Some of the risks and uncertainties that could impact our business are included in our 2014 10-K. In addition, our presentation will include non-gaap financial measures, and we have provided reconciliations to the most comparable GAAP measures in our earnings press release, which is available on our website at investors.nytco.com. With that, I will turn the call over to Mark Thompson. Mark Thompson Thank you, Harlan, and good morning everyone. Well, as you can see from the results we released this morning, we had a strong quarter and an encouraging 2015, and we begin 2016 with high hopes for the future. Let me deal first with the quarter, briefly review the past year as a whole, then turn to 2016 and beyond. In Q4 2015, we saw adjusted operating profit of $118 million, a 13 percent increase versus the prior year, driven by solid growth in digital advertising and consumer revenues, as well as good cost management. We had another quarter of strong net gains in digital-only subscriber numbers, with an additional net 53,000 subscribers. It was the biggest quarterly addition for three years and represented a 20 percent growth in subscriber numbers compared to the same quarter in 2014. Continued improvement in retention and growth of international subscribers, and the success of target pricing to specific market segments like college students all helped us maintain momentum. We believe our digital pay model has great potential and that is being borne out in the acceleration we are seeing in our year-over-year subscriber growth numbers, as well as the related revenue growth. 2/5/2016 9:25 AM 1
In our last earnings call, we predicted a return to revenue growth for digital advertising in the fourth quarter, and we achieved that. Indeed, we did somewhat better than we had predicted, posting an 11 percent year-over-year digital advertising revenue increase in Q4. Rapid growth in mobile ad revenue was an important factor, as was intense demand for the production and distribution of branded content. Important, too, was the November launch of the New York Times Virtual Reality app, not to mention the distribution of more than a million Google Cardboard VR viewing devices to our subscribers. Total revenues for the quarter were flat at $445 million, with strong digital performance offsetting a moderate print advertising decline as well as a slight decline in print circulation revenue. Significant cost control also accounts for the substantial increase in profitability. Let me now consider 2015 as a whole. In the fall, we published Our Path Forward, a short statement of our strategic ambitions for the coming years. Central to those ambitions is our determination to double our pure-play digital revenue over the next five years, and it was very encouraging to see tangible steps towards that target in 2015. During the summer, we passed the one million digital-only subscriber mark, and we ended 2015 with 1.1 million digital subscribers. We expect to end 2016 with more than a million and quarter digital-only subscribers. The digital advertising market is undergoing profound change, and we are not immune to its volatility, but we believe that our strategic approach to rapidly build out new high value propositions for marketers in branded content, mobile, video and VR is paying off, with strong growth in three out of four quarters. We will continue to invest in advanced storytelling technology and talent, in mobile ad innovation, and in a broad range of services to help advertisers reach their target audiences on our own assets and across other platforms. T Brand Studio is a particular success story with no fewer than 120 campaigns launched for 70 advertisers since we started the business in January 2014, just two years ago. We don t expect digital advertising revenue growth associated with these new growth areas to be even across the year, but we are confident that we have the talent and the drivers in place to make 2016 a year of strong digital advertising growth. Print advertising continues to vary unexpectedly month to month, but the significant falls we saw in the first half of the year moderated somewhat in the second half. As you will hear, so far at least, that more moderate picture is extending into early 2016. Print circulation revenue followed a more predictable pattern with home delivery price increases compensating for most, but not quite all, of the volume declines both in home delivery and single copy sales. Adjusted operating profit for the year was up to $289 million, compared to $256 million for 2014, due to lower costs and strong digital revenue growth. I might add that 2015 was a very strong year for Times journalism with exceptional work in international news where our continued investment in global newsgathering enabled us to cover stories like the refugee crisis and the Paris attacks with more depth and focus than any other news provider as well as investigations and features. I think It's also worth noting the exceptional and innovative coverage of Tuesday's Iowa Caucuses. We saw traffic totals in the top 1% of all traffic days in the history of The New York Times and very high levels of 2/5/2016 9:25 AM 2
engagement, including the highest number of readers we have ever seen on a live blog during a 24-hour period. The presentation of the story on smartphone, complete with animating infographics, broke new ground. So what are our plans for 2016? Our Path Forward calls for us to reach out to new audiences at home and abroad to substantially grow the number of the most engaged users; to further grow both our digital circulation and advertising businesses; to develop our mobile, video and branded content businesses; and to exploit other B2B and B2C opportunities. Over the course of 2016, therefore, we expect to invest judiciously in growth: to develop content for targeted international audiences and to market The Times more effectively to them; to grow our multimedia capabilities in video, VR and audio; to further build out T Brand Studio and to extend the package of services we offer our advertising partners; as well as other initiatives. But one of our achievements in recent years has been to combine investment in digital growth with a tight grip on costs, and we are still determined to focus on both. Over the coming months, we will take a close look at our existing cost base, even as we make targeted investments in our digital future. We know that success for us depends on the quality of the journalism we offer our users here and around the world and that we must maintain that quality. Nonetheless, we believe that alongside investment in our newsroom and elsewhere, there is scope for further structural savings across our cost base. Deep into its digital transition, The New York Times Company unlike many of its rivals remains a very profitable company and we are determined to grow that profitability, just as we did in 2015. Although in 2016, we expect our investment in digital will put downward pressure on operating profit, we are committed to returning to operating profit growth as quickly as we can. In summary, I see 2016 as an investment year, building on our strategy and some of the key successes of 2015. I see it as a year of continued transformation of the business to meet the changing needs of our customers and a changing market. And I see it as a year in which we take the necessary steps both to double our digital revenue over the next five years AND to grow the company s profitability in the long term. But now let me hand over to Jim. Jim Follo Thank you, Mark, and good morning, everyone. As Mark said, we closed 2015 with a solid fourth quarter, highlighted by strong growth in profitability, driven by solid digital consumer and advertising performance, and good cost control. Adjusted operating profit rose 13 percent in the quarter to $118 million and adjusted diluted earnings per share was $0.37 cents in the fourth quarter, compared with $0.26 cents in the prior year. We reported GAAP operating profit of approximately $88 million, compared to $62 2/5/2016 9:25 AM 3
million for the same period of 2014. Overall revenues were flat in the quarter, with strong digital revenue growth offset by weakness in print revenues. For the full year, adjusted operating profit also grew 13 percent to $289 million, while operating profit grew 49 percent to $137 million, on revenues that were down less than 1 percent, or $9 million. Circulation revenues increased approximately 1 percent in the quarter, with digital-only subscription revenue growth more than offsetting print declines. Digital-only subscription revenues were approximately $50 million in the quarter, an increase of 13 percent from the same quarter in 2014. On the print circulation side, we benefited from January 2015 s home delivery price increase, although higher revenue associated with the new rates was outweighed by overall print volume declines. The print decline was driven by lower single copy revenues. We have again implemented a home delivery price increase at the beginning of the first quarter 2016, at a rate similar to recent annual price increases. Advertising revenues were down 1 percent in the quarter, with digital revenue growing 11 percent and print advertising declining 7 percent. The digital advertising performance was particularly encouraging given the tough year-over-year comparisons, where digital advertising grew 19 percent in the fourth quarter of 2014. Digital advertising reflected strong growth in mobile, branded content and creative services revenues. Revenues from our initial slate of VR films in the quarter also contributed to growth. Mobile revenues continue to grow at a rapid rate versus 2014, up 72 percent in Q4 and 58 percent for the full-year, and represented approximately 22 percent of total digital advertising revenues in the quarter. The lower print advertising revenue was due to declines in The New York Times and more significant declines in The International New York Times. In The New York Times, luxury, media, travel, real estate and home furnishing categories all performed well in the quarter, while entertainment, financial, technology and telecom advertising were weak. The decline in the International New York Times was mainly driven by a decline in the luxury category. Foreign currency exchange rates also played a part in the decline. As usual, we experienced significant month-to-month volatility in advertising revenues. Our quarterly performance strengthened as the quarter progressed, as illustrated by the fact that overall advertising was down 9 percent in October, flat in November and up 7 percent in December. And finally on the revenue side, other revenues were flat in the quarter. That category includes NYT Live, which is our live events business; our Crossword product; building rental income, digital archives, and others. Digital archives and building rental income grew in the quarter, but were offset by declines from NYT Live and our retail store. The decline in NYT Live was inpart due to the postponement of our luxury conference in Paris. Operating costs decreased again in the fourth quarter by nearly $30 million overall while 2/5/2016 9:25 AM 4
adjusted operating costs declined $14 million, or 4 percent. Operating costs declined in the quarter mainly due to print production and distribution efficiencies, declines in severance, depreciation, amortization, and raw materials costs as well as lower marketing and promotion, benefits and non-operating retirement costs. Our focus on reducing legacy costs remains a top priority, while at the same time, we will continue to invest in growing our digital revenue. Our non-operating retirement costs were down in the quarter to $7.5 million, from $11.2 million in the prior year, due to both lower pension interest expense and retiree medical costs. Moving to the balance sheet, our cash and marketable securities balance was $905 million, and our total cash position exceeded total debt and capital lease obligations by approximately $473 million. While our qualified pension obligations declined at year-end due to a rise in discount rates from the prior year, plan asset performance trailed our expectations. Thus, our unfunded qualified pension obligations ended the year roughly flat with the prior year, at $273 million. The Company has repurchased approximately 6.5 million Class A shares for $83.0 million to date as of February 2nd, under our previously announced $101 million share repurchase authorization. Let me conclude with our outlook for the first quarter of 2016; Circulation revenues are expected to increase at a rate similar to the fourth-quarter trend, driven by the benefit from our digital subscription revenue growth, partially offset by lower print circulation revenues, despite the impact of the home delivery price increase. We expect the total number of net digital subscriber additions to be about 50,000 in the quarter. Overall advertising revenues are currently expected to be down between 2 and 4 percent, with digital advertising growing in the mid-single digits. Other revenues are expected to increase approximately 10 percent. And first-quarter operating costs and adjusted operating costs are expected to increase in the low single digits. Due primarily to a change we are making in calculating interest costs on our legacy pension obligations, we expect non-operating retirement costs to decline by approximately $4 million in the first quarter to $5 million. As Mark stated in his remarks, as we look out for the full year, we expect adjusted operating costs will increase in the low to mid-single digits as we invest in certain areas of the business that we believe we can grow over time. We will continue to maintain a strong cost discipline that we have exhibited in the past, but are willing to invest in areas of growth. And with that, we'd like to open it up for questions. 2/5/2016 9:25 AM 5