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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning and welcome to The New York Times Third Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference over to Harlan Toplitzky, Vice President of Investor Relations. Please go ahead.
Thank you and welcome to The New York Times Company's third quarter 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.
Thanks, Harlan. And good morning everyone. Our third quarter results support our confidence in our strategy, and reinforce our conviction in the long-term opportunity for The New York Times Company.
We made steady progress in the quarter toward becoming the essential subscription for every English-speaking person seeking to understand and engage with the world. We did so by advancing the three pillars of our strategy: leading in news, helping people make the most of their lives and passions, and putting those ideas together in a bundle that makes The Times indispensable in the daily lives of millions more people.
Even with the macroeconomic headwinds we anticipated playing out largely as we expected, we're showing the potential of our differentially valuable product portfolio and multi-revenue stream model to drive sustainable growth and profit improvement as we scale.
Overall revenue grew in the quarter nearly 8%, with subscription revenue growth more than making up for a slight decline in overall advertising. That revenue growth, combined with slowing cost growth, drove a 6% increase in adjusted operating profit.
With three quarters of the year behind us, we are improving our outlook for full-year 2022 results to the high end of the range we first provided in February. We now expect adjusted operating profit on a consolidated basis of between $320 million and $330 million dollars, even with the dilution from our acquisition of The Athletic.
I'll turn now to our third-quarter subscriber results. We added 180,000 net new subscribers in the quarter, with a slow start in July, a pickup in August, and a strong September. The biggest story of the quarter was our continued progress on the bundle, with mounting evidence that our strategy is working. The third quarter was our best quarter yet for bundle net additions, with a record number of bundle starts and percentage of starts taking the bundle.
To give you a sense of the pace of our progress: in Q3, the percentage of starts on the bundle was double what we saw in Q1. This progress was the result of deliberate efforts to cross-promote our products on our biggest news surfaces, and also to begin making them more interconnected. For example, we added Wordle to the main feed of our core news app, and rolled out a Play tab in the app. We also substantially shifted our merchandising efforts to feature the bundle more prominently across News, Cooking and Games. And we continued to improve onboarding to the bundle to help new subscribers engage with multiple products.
This was the first full quarter that The Athletic has been part of the bundle, and we began to more aggressively market it as such to prospects. We also made it easier for current Times subscribers to find and engage with The Athletic by adding a "sign in with The Times" feature. While it's early days, we're encouraged by the number of bundle subscribers who have activated their Athletic access; by their level of engagement with The Athletic; and by their early retention.
Leveraging the whole of our portfolio to drive the bundle is our priority over the coming quarters. As we do that, we'll be taking measures to further open up The Athletic's hard paywall to substantially increase awareness and free sampling of The Athletic in order to build a large, sustainable audience funnel. We expect that this will result in slower additions of subscribers on a standalone basis for some time, as it did in the third quarter. Our ambition here is to become one of the leading players in global sports journalism, and we're confident that in doing so, we'll create significant value for shareholders.
Notably, we continued to see higher engagement among bundle subscribers, with 10% to 20% more bundle subscribers engaging each week than news-only subscribers. This is true across the entire base and among cohorts of bundle subscribers who are in their first few months with us – an encouraging sign given the strong relationship we have seen between subscriber engagement and retention.
As a result of the efforts I've just described, The Times crossed an important milestone in the quarter: We now have more than 1 million bundle subscribers – discernable momentum on a key element of our strategy to drive revenue, profit, and shareholder value. The Times now has more than 9.3 million subscribers, with 10.8 million subscriptions, well on our way to our next mile marker of 15 million subscribers by 2027.
Digital subscriber revenue grew 23% in the quarter, driven primarily by successfully stepping up subscribers from promotional offers to higher prices, which continues to go well and reflects our strategy in action. In addition, we view progress on our bundle strategy as a key indicator of future revenue growth, as bundle subscribers pay roughly 50% more than news subscribers.
We continue to believe that volume growth is our biggest driver of long-term shareholder value. But we are also working through how best to exercise our pricing power on our individual products. We believe price increases on individual products can drive more people to take our bundle and can also help us realize more value from tenured subscribers. We expect to have more to say about this in the coming months.
Let me turn now to advertising. For The New York Times Group, digital advertising outperformed our guidance in the quarter, while print slightly underperformed. Overall performance was as expected given the stiff headwinds we anticipated.
We saw the impact of deteriorating macroeconomic conditions most clearly in our tech and media categories. Still, there were several areas of relative strength in a tough market, like direct-sold display advertising. We believe that strength underscores the value of our first-party data and premium ad products, our unique audio offerings, and the appeal of The Times brand and varied product set to a wide range of marketers.
Speaking of our appeal to a wide range of marketers: we officially launched display advertising on The Athletic at the end of the quarter. While it will take time for the business to fully ramp up, demand is strong and we're off to a good start. Even in a difficult market, The Athletic is attracting new advertisers and securing incremental ad buys from existing Times advertisers.
As reflected in our forward-looking guidance, we expect continued macroeconomic headwinds to impact our ad business in the near term. But the resilience of The Times' ad strategy and the attractiveness of The Athletic opportunity give us confidence in advertising as a longer-term growth driver.
Now, having talked about revenue, let me turn to costs. In Q3, we began to see the benefits of our commitment to meaningfully slow cost growth. Savings came from two major areas, and are part of a deliberate strategy we've been pursuing and describing for some time now.
First, as we've become more effective in driving subscription growth through our organic audience engine and digital product work, we've substantially reduced our marketing spend. Second, while we continue to invest thoughtfully in areas that widen our moat – our newsroom, engineering, and data teams – we've slowed headcount growth across the Company.
Given our strategic clarity and ability to execute, we believe we are well positioned to support our future growth. These cost discipline efforts are strategic, and we expect them to be sustainable.
2022 has been a year of intense market uncertainty. The headwinds that we envisioned when we shared our mid-term AOP target have materialized, largely as we expected. But we have a powerful, multi-revenue stream model with great unit economics, and we believe we are well poised for further growth. We're managing through the headwinds effectively, and aggressively working to capture the tailwinds.
And with that, I'll hand it over to Roland. I look forward to answering your questions shortly
Thank you, Meredith. And good morning. As Meredith said, our third quarter results, combined with our fourth quarter outlook, suggest we expect to post a strong full year 2022 result, even as we face macroeconomic headwinds.
Turning to the quarter, adjusted diluted earnings per share was $0.21, $0.02 lower than the prior year. We reported adjusted operating profit of $69 million, higher than the same period in 2021 by approximately $4 million, as growth in profit at The New York Times Group was partially offset by losses at The Athletic, which were slightly less than we expected in our acquisition plan.
Adjusted operating profit at The New York Times Group was approximately $79 million in the quarter, higher by approximately $13 million compared to the prior year, while The Athletic lost approximately $9.5 million.
On a consolidated basis, the company added 180,000 net new digital-only subscribers and 210,000 net new digital-only subscriptions in the quarter, with continued strong growth in adoption of our bundled product.
As Meredith noted, in the third quarter, the percentage of starts on the bundle doubled versus what we saw in the first quarter and we passed 1 million digital bundle subscribers.
As reflected in our public reporting, we also surpassed the 2 million mark for combined digital-only bundle and multiproduct subscribers. This is a key metric because the data tells us that those subscribers using two or more products not only pay more, but are more likely to retain than those using only one product.
The number of digital-only bundle and multi-product subscribers grew by approximately 150,000 in the quarter, driven mainly by increases to the number of bundle subscribers. Note that we made a slight change in this metric since last quarter by excluding our print home delivery subscribers in order to provide investors with a clearer picture of our digital growth.
We continued to enable access to The Athletic to additional bundle subscribers in the third quarter, a process which began late in the second quarter. This action was the primary driver of the increase in digital-only subscribers to The Athletic in the quarter.
Total subscription revenue increased approximately 12% in the quarter with digital-only subscription revenue growing approximately 23% to approximately $244 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 stand-alone subscriptions.
It's worth noting that we began enabling access to The Athletic product for our digital bundle subscribers late in the second quarter, which we believe increases the value of the bundle for both potential and existing subscribers.
To account for this value, as noted in our second quarter 10-Q, we are allocating a portion of digital subscription bundle revenue from The New York Times Group to The Athletic, resulting in a reduction in the amount of revenue recorded at The New York Times Group.
Moving to digital-only subscriber ARPU, which includes all of our digital products. For the quarter, digital-only subscriber ARPU decreased 8% compared to the prior year from $9.64 to $8.87 and increased approximately 50 basis points compared to the prior quarter. The year-over-year decline on the consolidated ARPU is primarily a result of the inclusion of The Athletic.
Excluding the impact of The Athletic, the declines were significantly less pronounced, although the effect of new subscribers at introductory promotional prices, including a large number of new games subscribers, more than offset the ongoing gains from subscribers converting to the bundle or otherwise transitioning to higher prices.
Ex The Athletic, domestic ARPU increased modestly both year-over-year and sequentially due to the large cohort of subscribers graduating from promotional to higher prices in the period. The domestic ARPU result demonstrates the power of our long-term pricing strategy continuing to play out.
Print subscription revenues declined approximately 3.5% as the benefit from the first quarter home delivery price increase did not fully offset lower volumes in both home delivery and single copy.
Total advertising revenues decreased approximately 0.5% in the quarter with growth in digital advertising nearly offsetting declines in print. Digital advertising grew 5% as a result of higher direct-sold advertising at The New York Times Group and the addition of advertising revenue from The Athletic, which more than offset lower revenue from fewer programmatic advertising impressions at The New York Times Group. Meanwhile, print advertising was lower by 8.5% compared with 2021, primarily driven by declines in the advocacy and media categories.
Other revenues decreased approximately 2% compared with the prior year to approximately $55 million, primarily as a result of lower licensing revenues, partially offset by higher revenue from Wirecutter affiliate and live events. Licensing revenues were lower primarily due to a one-time book deal in 2021.
Adjusted operating costs were higher in the quarter by nearly 8% as compared with 2021 due to the addition of costs associated with The Athletic, while costs at The New York Times Group were flat. These results were consistent with our plan for cost growth to slow in the back half of the year.
Adjusted operating costs were slightly better than the guidance we provided in the second quarter as a result of lower cost of revenue, mainly in print production and distribution and subscriber servicing.
I'll now discuss the cost drivers for The New York Times Group. Cost of revenue increased 7% as a result of growth in the number of employees who work in The New York Times newsroom, as well as higher subscriber servicing costs.
Sales and marketing costs decreased approximately 32%, largely due to lower media expenses. Media expenses were $27 million dollars, approximately 50% below last year, which was a period of elevated marketing spend.
Product development costs increased approximately 14% as a result of growth in the number of digital product development employees in connection with strategic digital subscription initiatives.
And general and administrative costs grew approximately 6%.
We had one special item in the quarter, a $7 million gain related to a multiemployer pension liability adjustment.
Our effective tax rate for the third quarter was approximately 28% versus an expected marginal rate of 27%.
Moving to the balance sheet, our cash and marketable securities balance ended the quarter at approximately $469 million, an increase of approximately $16 million compared with the second quarter of 2022. The company remains debt-free with a $350 million revolving line of credit available.
Share repurchases during the third quarter totaled $25 million and the company continued to purchase shares subsequent to the end of the quarter. Approximately $57 million dollars currently remains under the company's repurchase authorization.
Taken together with the payment of our $0.09 quarterly dividend, we expect 2022 capital returns to exceed the high-end of the guidance we provided at our June Investor Day targeting capital return of 25% to 50% of free cash flow. The continuing repurchase activity reflects our view that our shares are an attractive value and our willingness to repurchase shares beyond offsetting the impact of share-based compensation when we see opportunity in the market. Within the context of our prudent capital structure, we will continue to evaluate opportunities for capital return.
Let me conclude with our outlook for the fourth quarter of 2022 on The New York Times Group, which does not include The Athletic. Please note that this guidance reflects the impact of an extra week in our fourth quarter of 2022 as compared with 13 weeks in the same period of 2021. Comparisons are to the company's consolidated results for the fourth quarter of 2021 prior to the acquisition of The Athletic. The effect of The Athletic on our consolidated guidance has been included in the outlook section of the earnings release that we published this morning.
For The New York Times Group, total subscription revenues are expected to increase 10% to 13% compared with the fourth quarter of 2021, with digital-only subscription revenue expected to increase approximately 20%. Both overall and digital advertising revenues are expected to be lower by approximately 10% compared with the fourth quarter of 2021, which was our largest digital quarter ever, mainly due to macroeconomic conditions, on top of challenging comparisons to last year, especially in the technology category.
Other revenues are expected to increase in the low-single-digits. Adjusted operating costs are expected to be approximately flat compared with the fourth quarter of 2021. Given the uncertain macroeconomic environment, we continue to look closely at costs while strategically investing in areas that widen our moat, like journalism and digital product development.
Given our performance through September and our outlook for Q4, we are updating and further quantifying our AOP guidance range for the full year to between $320 million and $330 million.
Given the challenging macroeconomic backdrop, we feel this updated guidance reflects the strength of our model and soundness of our essential subscription strategy.
And with that, I'll turn it back to Meredith for some final thoughts.
Thanks, Roland. Before we open the line for Q&A, let me reiterate a few key takeaways. We're making great progress with the bundle, which underpins our ability to better penetrate our addressable market and drive more volume and revenue. Given our confidence in our strategy and the investments we've already made, we've been able to actively slow cost growth.
Even amid ongoing macroeconomic headwinds, we believe the strength of our subscription-first, multi-revenue stream model will enable us to build a larger, more profitable business. And we're aggressively chasing the tailwinds that will best position us to grow revenue and profit.
And with that, we'd be happy to open it up for questions.
[Operator Instructions]. Our first question comes from Thomas Yeh from Morgan Stanley.
I really appreciate all the color on the bundle adoption strategy. We're starting to see the uncertain macroenvironment impacting advertising more broadly across this space really. Can you talk a bit about maybe more on the offsetting impact on the subscription side, as you shift towards selling more on a higher ARPU bundle, whether or not there's an increased impact related to churn or growth acquisitions. I think, typically, 3Q, we see the seasonal uptick in subscriber net adds relative to 2Q. And the 180,000 was sequentially similar. Just wondering if the ongoing changes to how you merchandise the product is causing some additional noise there.
I'll say a few things and, Roland, you'll add as you see fit. The first thing to say is if we look back in history, changes the macroeconomic environment thus far at The Times have tended to have more impact on the ad business than on our subscription business. And I'd say that's been the case as long as we've been doing both things very, very broadly. So that's what history would suggest.
As far as the net add number in the quarter, I'll point to the pattern. Typically, we do have a slow summer, and we did, and we saw real pickup in August and further acceleration in in September. And I would just say, in general, we continue to believe we're well on track for our medium term target as of next mile marker, 15 million subscribers by year-end 2027. And we feel really good about the progress we're making on the bundle.
I'll just remind everyone that the bundle itself, ultimately, people pay somewhere in the neighborhood of 50% more for it, but it's also part of the penetration strategy. We think news is going to continue to be very appealing to people. But whatever the news cycle, we now have a number of other things that will appeal as well.
The one thing I would add is that we didn't see any negative signs on the retention side of the business. As a matter of fact, it was tick better than we had seen recently. So we were happy about that. You might expect to see a little bit of that in cancellations from the economy, and we did not see that.
Just as a follow-up for Roland. We're starting to see some nice operating leverage in the model, as you mentioned. Does the advertising environment change your view on the ability to deliver on margin expansion expectations into next year?
Yeah. At this point, we don't see a reason to come off those expectations. We still think the core of the business is strong. You've seen this quarter a good illustration of what we've been able to do on the cost side. And as Meredith mentioned, the actual return on the cost side, we believe to be strategic and that will be durable. And we expect that to follow through into future quarters. So we still feel good about that.
I'll just add that we largely anticipated what we're seeing in advertising and that's been reflected in everything we've suggested.
The next question comes from Vasily Karasyov from Cannonball Research.
I wanted to ask you to talk about your visibility into subscriber acquisition and retention trends now versus a couple of years ago or a little earlier when you were just starting your digital business growth because we all remember that it was hard for you to predict what a quarter would look like even in the middle of the quarter. Has that changed? And if so, why? And what kind of expectations do you have now based on that?
A couple of things. I think the durability of the subscription model would suggest that our visibility on revenue remains pretty good. We don't guide on net adds because we don't think that's – we've long said, we don't expect that to be linear quarter to quarter and you're going to see a lot of variability for a lot of different reasons.
I'll point to a few things about the drivers. And maybe this is part of what was underlying Thomas' question as well. The things we do see as sort of increasing control over key levers, Roland mentioned churn, we've long said now, and we talked about this a lot last year, that churn was at a manageable level, we needed to keep it as such. And we feel – anything can change at any moment. But we feel pretty good about our ability to do that so far.
And we also talked a lot last year and really this year about the importance of subscriber engagement, which is like the most important leading indicator on churn, and we also feel quite good about our ability to drive that through the differential quality and value of the product, the widening product set, but also the kind of product interventions we make when we enhance how the product works. That's really working. And that gives us some greater sense of control, which you're getting at.
What we have less control over is audience. And I'll point to two things that certainly change. Obviously, the news cycle itself is going to continue to change. It will ebb and flow. The big thing that we've seen this year that's been different from past years is we've had a number of years where it was kind of one or two very, very big storylines driving the news cycle. And now we're seeing a much more varied set of stories. And that means the audience pattern changes.
And then there's been a fair amount said kind of about the exogenous factors, the big tech platforms are in some ways kind of shifting away from sending as much audience as they were sending to new sites. And I'll just say there, we felt that a bit in the quarter. We've also got a really good track record of adapting to exogenous changes in in the ecosystem.
The next question comes from Doug Arthur from Huber Research Partners.
Two questions. Roland, the 45% drop in media expenses in the third quarter, is that just because of the big expenditure a year ago? Or is there some sustainability to kind of the strength of the funnel that you feel you can keep that contained going forward? And then I've got a follow up on net adds.
It's much more the latter, though the comp did contribute to the 45%. But we are now at a point that I think we've been predicting for quite a while where we believe the investments we've made in the product, the improvements we've made there are starting to really pay off to get the product to do some of the work that we used to have done with paid marketing. So we do see this as completely sustainable and kind of the approach that we'll take going forward. So we're quite happy about how that's working out.
Meredith, when you onboarded The Athletic, the digital subscriber number was about 1.2 million. The way you're reporting it now, looks like it's just under 2.3 million. Is that an apples-to-apples comparison? Or does that include some benefit of the bundle? I'm a little confused on that.
The short answer is it does include the benefit of the bundle and that's been a huge area of focus, getting our current all-digital access subscribers and all access subscribers to activate The Athletic and then getting them to engage. But Roland may have more to say about the kind of specifics on reporting.
Just on the reporting, that is everyone who has access – who was paid subscription and has access to The Athletic. So, as I mentioned in my prepared remarks, we enabled a very large number of our existing bundle subscribers to get access to The Athletic. That happened at the very end of last quarter. But most of it happened this quarter. So this is the first full quarter. But so you see a large number of folks on the bundle added into that number and we now have over 1 million bundle subscribers. So that is the big push there.
Just as a quick follow-up, Meredith, when you acquired The Athletic, I think you guided to a loss of $50 plus million for 2022. That looks like you're running well below that at this point. Is that fair?
Fair.
The next question comes from David Karnovsky from J.P. Morgan.
Meredith, you noted in your prepared remarks, potentially increasing prices on the standalone products to drive bundle uptake. Just interested to know how you think about when's the right time to execute on something like that, especially as we're kind of hitting a potentially weaker economic period?
One for Roland. Since you're now guiding the year in terms of adjusted operating profit, is it possible just quantify the benefit of that extra week to the fourth quarter?
The first thing to say is, when we think about shareholder value, broadly, we continue to believe that growing volume is the best way to create more value. So, we are always looking for what is the optimal way to grow both volume and realized price.
But we're now living through a period of what I'd call prolonged inflation and we're paying close attention to what other companies are doing around inflation and price rises. I'll say we've got a strong history here of taking a measured approach and kind of testing and learning to positive effect. And some will remember, we did that with a tenured price increase on news, I think, a couple of years ago now, Roland. So, kind of tested our way into it, figured out the optimal way to do that. And that's how we're thinking now, really asking ourselves, is there an opportunity to do that across the individual products for two reasons, to sort of compel people to take the bundle and also because tenured subscribers tend to be the ones who are getting the most value out of the product.
So, as we work our way through that and figure out if we can find that point of optimal volume and price, we'll share more.
David, to your question about the 53rd week, we're not able to ascribe costs perfectly to the 53rd week, but I think the way to think about it is that that week is worth about $10 million on an adjusted operating profit basis.
The next question comes from Craig Huber from Huber Research Partners.
Meredith, can you just talk a little bit further about engagement via digital products you have on a like-for-like basis, how that might have changed now versus, say, a year ago, is my first question.
We are intensely focused on subscriber engagement across the portfolio. And while we don't quantify that, I'll just say we broadly feel quite good about it. Even as the subscriber base grows, we're kind of able to hold on broadly to a level of engagement that we think is important to the model and important to getting to our next mile marker on volume and important to everything we're doing from a bundle perspective. And I'll say on the bundle, something that's been very pleasing as we continue – obviously, we're driving more people to the bundle and all the ways we've described so far, but we're continuing to see bundle subscribers engage 10% to 20% better than news subscribers. And again, I'm telling you kind of enterprise engagement is good, but bundle is even better. And that's the huge area of focus. That's why – Roland and I've described, we've said, like, first priority on The Athletic is get it into the bundle, get people using it. So, I'd say that all feels broadly good.
There's a bunch of stuff we don't control in overall audience. And there, we feel confident that we've got a good track record of adapting to whatever comes our way in terms of platforms and the ecosystem, but feel really good about subscriber engagement.
And I'll say one more thing. Within each product and then across the bundle, we still have plenty of levers to continue to drive engagement. There's just a lot in these products to get people to come back
My other two questions real quick, if I could. I think, Roland, you mentioned you have $57 million left on your share buyback program. And if you wanted to, obviously, you could exhaust that in one quarter in pretty quick order. How are you, your management team and your board of directors, think about capital returns going forward once that is exhausted here, given your very clean balance sheet. Are you guys thinking about potentially upping that significantly here? And also, we can talk about the dividend as well. Is there any potential chance to increase that?
And then, my nitpick question, if I could, where is the size of your newsroom at now, the number journalists versus, say, beginning of the year?
I'll take the first questions. So, the capital return policy and the moves we might make prospectively would be a conversation that we would have with our board. I don't have a lot more to say about it today. I think I think the moves we made and announced last February showed a bit of a shift in our philosophy, which we think was a positive step to be able to return capital to shareholders.
I'm happy to take the newsroom question, Roland. I'll say, as we've said for a long time, we continue to invest thoughtfully into the newsroom. We believe our moat is having a product that is differentially valuable first to news, but across the breadth of human experience and then across now a growing bundle of products. And I think we've been very conscientious about those investments, particularly in the current macroeconomic environment, but the number is growing modestly. Harlan, I always forget what we disclose here. But I think it's around 1,700 and growing a little bit beyond that this year. Maybe 1,800 now.
This concludes our question-and-answer session. I would like to turn the conference back over to Harlan Toplitzky for any closing remarks.
Thank you for joining us this morning. We look forward to talking to you again next quarter.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.