Earnings Call Transcript - NYT Q4 2022

Harlan Toplitzky, Vice President of Investor Relations

Good morning, and welcome to The New York Times Fourth Quarter and Full Year 2022 Earnings Conference Call. I would now like to turn the conference over to Harlan Toplitzky, Vice President of Investor Relations. Please proceed. 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 Levien, President and Chief Executive Officer; and Roland Caputo, Executive Vice President and Chief Financial Officer. Before we begin, I would like to remind you that management will make forward-looking statements during the course of this call. These statements are based on our current expectations and assumptions, which may change over time. Our actual results could differ materially due to a number of risks and uncertainties that are described in the company's 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 Kopit Levien.

Meredith Kopit Levien, President and CEO

Thanks, Harlan, and good morning, everyone. 2022 was the first full year of executing our strategy to become the essential subscription for every serious 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 margin. 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 adds 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 a 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 bundled 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 6 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 bundled 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 towards the bundle to yield benefits that continue accruing well into the future. We recently passed the 1-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 Times bundle, significantly widening its audience funnel by further opening up its hard paywall and increasing overall awareness for The Athletic 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 strategy. 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 platform, and a more varied news cycle but we've shown that we have a strategy 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 test. 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 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 Toplitzky who has served ably as Head of Investor Relations for The Times for the last 6 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 long-time Times colleague, Roland, will retire midyear. 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.

Roland Caputo, Executive Vice President and CFO

Thank you, Meredith, and good morning. As Meredith said, we're very pleased with the fourth quarter results we are 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 of The New York Times Group more than offset the losses at The Athletic. Turning to the quarter. Adjusted diluted earnings per share was $0.59, $0.16 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 $0.04 per share in the quarter and $0.16 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 products. The number of digital-only bundle and multiproduct subscribers grew by approximately 380,000 in the quarter, driven mainly by increases to the number of new bundled 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 6 days 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 6 days to provide like-for-like comparisons. However, estimating the cost impact of the extra 6 days for cost is more difficult than 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 graduate to higher prices, the new subscriptions we've 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 6 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 0.5% compared with 2021, primarily driven by growth in the luxury category. On a GAAP basis, which includes the impact of the additional 6 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 6 days, adjusted operating costs were higher in the quarter by approximately 8.5% 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 on 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 6 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 multiemployer 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 5 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. And 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 Company. This represents a change in practice in 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 1, 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.

Operator, Operator

Our first question comes from David Karnovsky from JPMorgan.

David Karnovsky, Analyst

Meredith, can you explain why you're revisiting the capital return program so soon, considering you haven't updated your midterm operating targets? What insights from the business give you the confidence to increase allocations for buybacks and dividends? Roland, you indicated that cost growth is expected to decrease in the latter half of the year. Would you be able to share your expectations for margin growth in 2023?

Meredith Kopit Levien, President and CEO

Sure. The update on capital return reflects our strong confidence in our strategy. We had an excellent first year of execution, and we are pleased with what we are seeing. We believe our model is strong and enduring. Roland, you may want to add more details to that.

Roland Caputo, Executive Vice President and CFO

Well, I mean, I just want to say we're really pleased to increase the return to shareholders at this time. And we believe that doubling that minimum percentage of free cash flow that we aim to return illustrates 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 Karnovsky, Analyst

Your second question was about cost and margin expansion. I want to emphasize that we plan to modestly increase our margins this year in 2023.

Operator, Operator

Our next question comes from Doug Arthur from Huber Research Partners.

Douglas Arthur, Analyst

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 evolving towards a $20 million annual run rate. You have to be somewhat pleased with that. Is that a fair statement?

Meredith Kopit Levien, President and CEO

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

Douglas Arthur, Analyst

Can you provide any details about the type of advertising you're attracting? I'm frequently on The Athletic, but I'm curious about the advertisers you're drawing in.

Meredith Kopit Levien, President and CEO

That's a great question. I would say there are two main areas to consider. The Times has a broad range of advertisers, and we receive specific campaigns from them. We are particularly pleased to see that in the early days with The Athletic, since we launched ads in September, we have some of the same advertisers as The Times, but they are providing us different campaigns that target different audiences. Additionally, there are many advertisers who invest significantly in sports that The Times doesn't usually reach, and we believe there is great potential to tap into that market. As you know, we appointed our former head of ads from The Times to lead The Athletic in building that business, and a few team members joined him to expand our efforts, which seems very promising. I should also mention that when we acquired The Athletic, it had a very small ad business focused mainly on audio, given their extensive podcast offerings that are worth listening to. What we are introducing is a premium display business similar to what we have at The Times, utilizing excellent ad canvases. You can see all the initiatives we've implemented at The Times, including the development of a wealth of first-party data and partnerships with marketers looking for more meaningful advertising beyond just display ads. We are adept at this at The Times, and we are applying that expertise to The Athletic.

Douglas Arthur, Analyst

Great. And then, Roland, just one sort of contextual question. In terms of this bundled multiproduct 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?

Roland Caputo, Executive Vice President and CFO

Yes. First of all, we updated the definition last quarter to exclude print, so that 2.5 million figure is solely a digital number. Additionally, we have two other categories of subscribers that we disclosed, which show how many people have news in their subscription and how many have Athletic. You can monitor those increases as well. Both bundles and standalone subscriptions are included. The majority of those subscribers have at least a news entitlement, along with something else. This is by far the largest segment, and I should note that the bundle is the fastest growing part of that.

Operator, Operator

Our next question comes from Vasily Karasyov from Cannonball Research.

Vasily Karasyov, Analyst

Meredith, you touched on it in your prepared remarks, but I wanted to ask you to talk in more detail about what you're seeing in how your subscribers or trial subscribers are behaving over the past several quarters that we're going through inflation, recession, or whatever we want to call it, 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 I would appreciate some color on that.

Meredith Kopit Levien, President and CEO

Sure, that's a great question. Generally, I would say we have not encountered any unexpected trends regarding subscriber engagement. In 2022, we concentrated heavily on subscriber engagement, and I believe it has progressed well. We are pleased with the results. Part of this success can be attributed to our dedicated efforts and resources aimed at encouraging new subscribers to explore more and prompting bundled subscribers or potential ones to engage further with us. We are enhancing our understanding of what truly enhances engagement, particularly when comparing bundled subscriptions to news. As I mentioned earlier, increased interaction with additional products, such as The Athletic or our cooking and gaming content, shows a tendency for retention. Therefore, we are prioritizing driving this behavior and have invested a lot of effort into its execution, which has been effective so far. I want to emphasize that maintaining churn at a manageable level has been crucial, and I believe we've succeeded in doing that. This will remain a focus, especially given the size of our subscriber base, as it is vital for our net add narrative. So far, everything is looking positive, and our bundle strategy contributes to that success. Overall, we have effectively managed churn.

Operator, Operator

Our next question comes from Thomas Yeh from Morgan Stanley.

Thomas Yeh, Analyst

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 stand-alone 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 Q1. I think down low single digit seems to be sequentially better than the core trends in Q4, excluding the extra days. Has the macro pressures that you cited as picking up stayed the same or updated as we headed into the last few months, that would be great?

Meredith Kopit Levien, President and CEO

On ARPU, there are several factors at work. First, we are successfully transitioning subscribers from promotions to interim and full prices, which is a crucial aspect of our model. Second, the bundle is priced higher than any individual product, even when on promotion. Over time, we expect to move bundle subscribers to higher prices as well, which shows the pricing advantage of the bundle compared to individual products. So far, the transition to full pricing is progressing well, and increased bundle uptake positively impacts ARPU. Additionally, we have been testing price increases for a segment of our long-term subscribers to individual products since late last year, and we are pleased with the results. Our experience with previous price increases, like the one in 2020 for news subscribers, gives us confidence in this approach, which should enhance subscriber monetization and improve ARPU this year. Regarding advertising, we believe we have the right strategy. It's a challenging market, but the Times benefits from being in various categories that perform differently based on market conditions. For example, luxury performed well last quarter, while other categories did not. Our diverse appeal to different marketers is advantageous. Moreover, the Times offers a premium environment with valuable first-party data, allowing marketers to target effectively while respecting privacy. This solid foundation supports our advertising strategy.

Operator, Operator

Our next question comes from Ashton Welles from Evercore ISI.

Ashton Welles, Analyst

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?

Roland Caputo, Executive Vice President and CFO

So 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 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, I think, a pretty typical run rate for the near future.

Operator, 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, Vice President of Investor Relations

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

Operator, Operator

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