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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 Company's Fourth Quarter and Full Year 2017 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded.
I'd now like to turn the conference over to Harlan Toplitzky, Executive Director of Investor Relations and Financial Planning and Analysis. Please go ahead, sir.
Thank you and welcome to The New York Times Company's fourth quarter and full year 2017 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 Operating 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 2016 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 turn the call over to Mark Thompson.
Thanks, Harlan, and good morning, everyone. Q4 2017 was another strong quarter for the company, with increased revenue and adjusted operating profit more evidence of the successful rollout of our digital strategy. But before diving into the detailed results of the quarter, I'd like to spend a few minutes reflecting on 2017 as a whole.
This was a strikingly successful year for The New York Times Company. Our newsroom and opinion departments did brilliant work, with coverage of the new Trump administration front and center, though the story of the year was not a conventional political one, but the explosive surge of revelations about sexual harassment, most notably the allegations of harassment leveled Harvey Weinstein, which set off a national and global firestorm of reaction, which continues unabated to this day.
More than anything, our strategy as a company is to double down on high-quality journalism, to invest in it and support it in every way we can. We believe that this uncompromising commitment is not just good for democracy and society, but the only way of building a successful digital news business. And in 2017, it paid off for our tens of millions of users and for the Company itself.
For the year, revenue grew 8%, compared to 2016, and adjusted operating profit grew 18%. Much of that was driven by very strong digital subscription revenue growth, more than $100 million of new revenue in a single year. And if we step back and look at the numbers, we can see how the economics of the Company are changing.
Since 2015, we've defined ourselves as a subscription-first company. In 2017, subscriptions for the first time in the history of The New York Times Company, delivered more than $1 billion of revenue. We still regard advertising as an important revenue stream, but believe that our focus on establishing close and enduring relationships with paying deeply engaged users, and the long-range revenues which flow from those relationships is the best way of building a successful and sustainable news business.
At the end of 2017, between our digital news product, our Digital Crossword and new Digital Cooking product, our loyal home delivery print subscribers, we had 3.6 million subscriptions, an unprecedented number for The Times, and one which is still growing strongly.
Now, as you know, in late 2015, we set ourselves the goal of doubling our pure play digital revenue from just over $400 million, which is what it was in that year, to at least $800 million, and we set a timeframe of five years to achieve that goal, with 2016 being the first and 2020 the last of the five years.
I'm often asked how we are doing against this goal. We don't provide a running commentary, not least because, as I've often noted, there can be real lumpiness on the advertising side, but the end of a calendar year is a good time for a progress report.
So, at the end of 2017, year two of our five years, pure play digital revenue, digital-only subscriptions, digital ads, Wirecutter and other smaller purely digital revenue streams accounted for $607 million of our revenue as a company. In other words, after just two years, we are halfway there. We believe, we are scaling our digital revenue more effectively than any other comparable news organization in the world.
2017 was a year when the ecosystem around The Times also changed. In particular, the major search in social media platforms faced criticism for not doing enough either to support serious news publishers or to ensure that the public could distinguish between real and fake or distorted news.
I can't do justice to this complex topic now, but let me note that Google's decision to meet requests from the New York Times and other publishers to do more to support digital pay models, in the way they surface (00:05:28) news content in search is welcome, as is Facebook's recent announcement that they will give relatively more exposure to trusted news sources like The Times in their newsfeed.
Although the impact of these changes will only become clear over time, we believe that the recognition by these major platforms, of the value of trustworthy news and the changes they're making, are strategically beneficial to our digital business.
So, let me now turn to Q4 2017 in detail, beginning with our subscription business. We added 99,000 net digital news subscriptions. Our shift of our subscription meter from 10 to 5 free stories per month happened late in the quarter. It is so far performing in line with our modeling, and we believe it will help us maintain our strong growth momentum in 2018.
When you add Crossword and Cooking, we gained an overall 157,000 additional digital subscriptions in the quarter. We're pleased both, with the continued strong growth represented in those headline numbers and in the continued strong retention, we're seeing amongst the large group of new subscribers who came to The Times from Q4 2016 onwards, and who are proving at least as loyal as previous cohorts. I can also say, we've continued to make encouraging progress and are seeing far lower monthly churn than a few years ago.
Total digital-only subscription revenue for Q4 2017 was $96 million. The quarter had 14 weeks. Once adjusted, so it can be compared like-for-like with the 13 quarter a year earlier. That represents an increase of 40% year-over-year. Print subscription single copy revenue was $173 million, less than half of 1 percentage point year-over-year decline on the same adjusted like-for-like basis.
Digital advertising performed slightly better than we had expected. And in the quarter at $84 million, which represents an adjusted like-for-like increase of 1%. Although there was significant variation over the quarters, digital advertising grew by a strong 11.5% for 2017 as a whole, compared to 2016.
As you'll hear when Jim discusses the outlook for the first quarter, we believe the 2018 will also see considerable variation across the quarters beginning with Q1 with the Q1, which we expect to be slightly down year-over-year. However, we believe that 2018 will be another year of overall growth in its revenue stream.
Print advertising declined in Q4 by 12% on a 13-week basis, an improvement on trends earlier in 2017. Cost grew as we continue to invest in brand and performance marketing, in current and future new digital products, and in critical parts of our newsroom and editorial departments. We expect to continue to invest in all of these things in 2018. We see the opportunity for further growth and want to continue to spend to secure it. That too will be reflected in Jim's cost guidance.
So the net result of all of this was that the Company's revenue for the quarter grew to $484 million and adjusted operating profit grew to $108 million.
And that brings me finally to Jim Follo himself. This is Jim's last earnings call for The New York Times Company. He retires from the company and his role as CFO at the end of this month. I do want to say that the results we're announcing today and the strong balance sheet that sits behind them are a testament of the brilliant job he's done for us, our shareholders, for our readers and for everyone who believes the great journalism is an essential part of a great democracy.
Jim has helped this Company through some difficult times to a point of financial stability, strong free cash flow, substantially reduced debt and effectively manage pension obligations. And above all, to real growth and business success. I've greatly enjoyed working alongside him for the past five years. And like all of my colleagues on the board and in the company, will miss him greatly.
We're deep in the process of selecting a successor and expect to have news on that in the coming weeks. But I just want to take this moment to thank Jim, to wish him and his family every happiness in his next chapter.
But, yes, I would say also to invite him for one last time to put some detail behind these financial results. Jim?
Thanks, Mark, and thanks for those kind remarks. And good morning, everyone. As Mark said, 2017 marked a milestone year for the company. Adjusted diluted earnings per share was $0.39 in the fourth quarter, compared to $0.30 in the prior year. We reported GAAP operating profit of $23 million, compared to an operating profit of $56 million in the same period of 2016. The lower operating profit was mainly due to changes related to our pension obligations.
As Mark referenced, our fiscal calendar in 2017 included an extra week. And, therefore, our fourth quarter included 14 weeks instead of the typical 13. The earnings release we distributed this morning has both, 14 and estimated 13-week basis. My comments on revenues today will exclude the impact of the extra week. However, estimating the cost impact of this extra week is more difficult and subjective.
Total subscription revenues increased by 11% in the quarter, with digital-only subscription revenue continuing to grow strongly at 40% in the quarter. On the print circulation side, revenues were down slightly as declines in single-copy revenue were mostly offset by higher home delivery revenue.
Total daily circulation declined 8.2% in the quarter, compared with the prior year, while Sunday circulation declined 3.5%. We implemented a home delivery and single-copy price increase in January of 2018. ARPU on our digital-only products stabilized in the fourth quarter as subscribers who initiated subscriptions in late 2016, began to cycle out of their promotion offer in the quarter. Since we experienced a significant increase in net subscription additions in the first quarter of 2017 as well, we expect this trend in ARPU to continue as more of these a year old subscription step-up to full price.
Moving along to advertising. We reported that total advertising revenue declined 7% as the print advertising decline more than offset a slight growth in digital advertising. The growth in digital advertising revenue was driven by smartphone and marketing services, which more than offset declines in direct sold desktop advertising.
Lower print advertising revenue was mainly due to declines in luxury, entertainment, retail and real estate categories, partially offset by growth in the technology and telecom categories. On a monthly basis, overall advertising revenue declined 14% in October, 8% in November and grew 2% in December, compared to last year.
Other revenues grew 10% to $32 million versus the same quarter in 2016, principally driven by affiliate referral revenue from the product review and recommendation website, Wirecutter, which we acquired in the fourth quarter of 2016.
GAAP operating costs increased 8% in the quarter, while adjusted operating costs increased 9%. The cost increase was related to the impact from the additional week in the quarter as well as higher costs from marketing, which were partially offset by lower print production and distribution costs.
In the quarter, we recorded five special items, which have been excluded from our adjusted results. First, we record a $37 million gain, largely related to the settlement of contractual funding obligations for a post retirement plan. We also recorded a $3 million charge in non-capitalized expense for the reconfiguration of our headquarters building to make more space available for rental income. Through the course of 2017, we recorded $10 million in non-capitalizable expense and approximately $60 million in capital related to this reconfiguration.
I'm pleased to report that we have signed a lease for rental of four floors, which we expect will begin generating rental income in the second quarter of 2018. We continue to be encouraged by the interest we have seen in the three remaining available floors and expect to begin recording rental income on these three floors at some point in the second half of the year.
On a related note, last week, we communicated our intent to exercise our option in 2019 to repurchase the 21 floors of our headquarters building, currently subject to a sale-leaseback arrangement. Next, we recorded $15 million charge in connection with exiting two joint venture investments.
In the fourth quarter, we sold our interest in Donahue Malbaie, a Canadian newsprint company, and we are in the later stages of winding down our investment in Madison Paper Industries, a partnership that previously operated a paper mill. We expect to receive our proportionate share of cash distribution from the wind down of our Madison investment, we expect to be approximately $12 million in 2018.
Continuing with the discussion of special items reported in the quarter. As a result of federal tax legislation enacted late last year, the company has recorded a $69 million charge, primarily related to the re-measurement of our net deferred tax assets. While we continue to analyze the future impact of the legislation, we believe that the tax reform will ultimately benefit the company's results beginning in 2018 with an effective tax rate expected to be in the high 20%s from the approximately 40%, we've reported historically.
And finally, as part of our continued efforts to reduce the size and volatility of our pension obligations, during the fourth quarter, we entered into a transaction with two insurance companies to transfer future benefit obligations and annuity administration allowing us to reduce our overall qualified pension obligations by $263 million. With these transactions, we have recorded $102 million settlement charge, which represents the acceleration of deferred charges that had been accrued in other – in accumulated other comprehensive income and the company's stockholders' equity section of the balance sheet.
Separate from these transactions, the company made discretionary pension contributions of $120 million pre-tax or about $72 million after tax, funded by cash on hand. These contributions improved the funded status of the plans, allowing us to further reduce both, pension volatility and the need for required contributions to the plans for at least several years in the future.
As a result of the discretionary contributions and strong asset performance, the funded status of our qualified pension plans improved significantly in the year. The underfunded balance of our qualified pension plans at the end of the year was approximately $69 million, an improvement of approximately $153 million over the prior year.
With the beginning of 2018, the rules with respect to pension reporting are changing. The impact of this change will be to move substantially all costs related to our pensions below operating profit. We have been reporting adjusted result excluding many of these costs already. However, the impact of this change will result in slightly higher adjusted operating costs and lower adjusted operating profit going forward, and prior year recorded amounts will be restated to reflect this change.
Moving to the balance sheet, our cash and marketable securities balance declined during the quarter, ending at $733 million. This decrease was largely due to the discretionary pension contributions I mentioned earlier. Total debt and capital lease obligations, principally related to the sale-leaseback of our headquarters building were approximately $250 million.
Let me conclude with our outlook for the first quarter of 2008. Total subscription revenues are expected to increase in the mid-to-high-single digits, compared to the first quarter of 2017, with digital-only subscription revenue expected to increase approximately 25%.
Overall advertising revenues are expected to decrease in the mid-to-high-single digits compared with the first quarter of 2017, with digital advertising decreasing in the low-to-mid-single digits, and our other revenues are expected to be flat.
Operating costs and adjusted operating costs are expected to increase from the low-single digits compared to the first quarter 2017. And non-operating retirement costs, which going forward will appear below GAAP operating profit, are expected to be approximately $2 million in the first quarter. We expect total capital expenditures to remain elevated for an additional year at between $60 million and $70 million, largely related to our printing facility in Queens, technology investments and the redesign of our headquarters building.
Now before I conclude, as Mark said earlier, I will be retiring from the company at the end of this month. Working for The New York Times for the past 11 years has been a great honor and a privilege. I've been particularly lucky to have served in this role for such a pivotal period in the company's history, one of enormous change, innovation in all parts of the business. The Times mission has never been more important. And I firmly believe that the Company is well-positioned for continued success.
And with that, we'll be happy to open it up for questions.
Yes. Thank you. We will now begin the question-and-answer session. And the first question comes from John Janedis from Jefferies.
Thank you. Best of luck, Jim, by the way. So, you guys spoke to this a little bit. So, can you remind us what the impact was when you moved the wall from say 20 to 10 a few years ago. Will the move from 10 to 5 articles be expected it to be much different? And is there anything more you can share in terms of your expectations from cutting the paywall from 10 to 5?
Sure. Good morning. This is Meredith. I'm happy to talk about that. We essentially expected the meter reduction from 10 to 5 articles to have a lasting impact. And thus far, it is essentially living up to our expectations. I do think that impact will diminish over time, but it remains to be seen to what degree.
Yeah. And it's fair to say that, I think, whereas when we moved from 20 to 10, it felt like that was almost only lever...
Yeah.
...we've discovered as we've gone deeper into this business, but there are many things, for example, our treatment of people coming from social, how we count usage of the times when people find it in Google, where we've made changes and improvements. And we think that although this is a significant lever to pull, we have several more levers...
Yes.
...we can think of pulling over, over the coming months and years as well.
That's right. And they're not all – not all of the levers are about a reduction of some kind of value. I think, we have a number of levers to pull in terms of adding value by way of product enhancements for subscribers and also adding value in terms of content enhancements for subscribers. So, lots of work underway now to determine the best ways to do that. And I think you'll hear us and see us continue to tinker with the model across this year.
Yeah.
Maybe that was a good lead. And I wanted to ask you, what impact are Google and Facebook change is having on sub adds and traffic.
Yes.
And is there any possibility to increase modernization in other ways like, maybe some of your peers, who talked about, or even possibly some sort of an app subscription on Facebook?
Yes. So, in general, as Mark said in his script, I think the changes by both Google and Facebook seem like they will be positive for us in the long run. On Google, specifically, since the change around first click free, we've seen more starts coming from Google, so more people actually make it down the funnel faster and that's had a relatively positive impact if a (00:23:28) modest one.
On Facebook, we haven't seen much change yet, but I will say over the long-haul, two things bodes very well for us. One idea that the algorithm will favor quality news is obviously good for The Times and good for others who do work like us.
And two, I think they do leave more room in the market for news businesses that are destination-based and relationship-based. And we think, over time, people's needs for news will increasingly seem to be better met and actually be better by organizations like ours that have thriving destinations, where you can get a lot of different kinds of news experiences.
And if I can maybe even kind of crew (00:24:17) the point which is, if some years ago the market and the world doubted whether there was strong demand and a strong need for quality journalism, we never did, but...
Yes. Yes. That's right.
...the really big change over the last year or so has been a recognition by the digital platforms, by consumers who are subscribing in greater numbers than ever before, and I think by the market, that differentiated high-quality news really is valuable. And over the medium-term, that opens up lots of possibilities.
Right.
For example, the possibility of distributors actually wanting to pay to have preferential access. Now, we're beginning to see that around the edges of payment for some video products and other special products that we've done in recent years, but I think the idea that the debate is changing from one, where there's been a big question mark about the whole area to one where really what's the best way...
Yeah.
...of that value expressing itself. As you think about monetization, what's the right combination of direct-to-consumer subscription, the opening up of partnerships for marketing and advertising partners to get access to it and to be associated with it. And indeed the possibility, I think, at this stage a possibility of direct payment from distributors. We don't know exactly how that's going to play out. What we do feel is, very emboldened that the fundamental value of what The New York Times does in its newsroom and and then this whole department (00:25:58) is really becoming visible and manifestly in our numbers. You can see the results of that.
That's right. That's right. I think the fact that we are succeeding, particularly as a destination in this moment and are already on, say, the home screens of millions of people devices bodes very well for our future business.
Thank you both.
Thank you. And the next question comes from Alexia Quadrani with JPMorgan.
Hi. Thank you very much. Can you please give us some color if possible on sort of what the net adds or the net digital subscriber adds were in the quarter if you sort of looked at it on a more normalized 13-week basis? I don't know if you can just sort of do the math and that's how you look at it or if there's something skewed in terms of what we might – might influence that.
And then the second question, the digital advertising growth, while solid in the quarter even on normalized basis, still seems very favorable given the guide. It's for Q1 and what you said. I guess, any sense when that will become or if that will become I guess a more consistent driver of ad growth?
Yeah. We're giggling.
On that second one – it will certainly make your modeling and indeed our own modeling somewhat easier.
Easier to rectify it. Great. (00:27:19).
But the character of the way that business is changing and the bigger deals that we're having means that, I use this British term lumpiness, but we're just seeing that.
Yeah.
I don't see that disappearing quickly.
Yeah.
What I would say about 2018, and this both, Meredith, in particular, and I have come across out in the market. We are pretty excited about the conversations and the kind of pipeline...
Yeah.
...of work that's emerging for 2018. So, when we look at 2018 as a whole, we're very bullish about what we're seeing, albeit recognizing that we're going to get off to a slow start.
Yeah. I'll give a little bit more color on that. I would say, echoing Mark, marketers are definitely wanting to buy the things that The New York Times has to sell right now, which are brand safety and a deeply engaged audience. And for lack of a better way to say it, like deeper brand love and very positive association. And also just the ability to direct people's attention at scale to things that matter, so, that makes for a very compelling proposition in the market right now. And because of that as Mark said, our big deal pipeline or our pipeline for partnerships is very strong.
Just to comment very specifically on Q4, and the guidance for Q1, we ended up doing a bit better, little bit better than we expected in Q4. But we think both, for Q4 and Q1, we're feeling the effects of comping against very strong periods of traffic around the election, and the media part of our ad business is still a fly-driven (00:29:06) business.
Second, we had a lot of new product to sell or just in the market in Q4 2016. We had less of that in the fourth quarter this year. You'll still feel the effect of that in the first quarter of 2018, but we're very optimistic based on the amount of new product we have from an editorial standpoint, from a product standpoint and a tech innovation standpoint, which makes us broadly optimistic about the ad business for 2018.
Yeah. And now, we're going to hand over to our departing CFO for an answer to the mystical question of how we should think about normalizing a 14-week course to a 13 for purposes of digital subscription ads.
Thanks for that, Mark. I'm not sure I actually have the answer to that. I do not have the answer. Look, my sense, as I recall, it's not a huge quarter post-holiday, so it's just a little bit of discounting, but I don't think it should be a major factor in the way we think about the...
I think that's right. I think that's right.
Okay. All right. Well, thanks so much. And, Jim, thanks for all your help over the years and best of luck.
Thank you.
Thank you. And the next question comes from Doug Arthur with Huber Research.
Yeah. Thanks. A couple of questions. I mean, Meredith, based on what Jim said about ARPU, I mean, you added 700,000 net digital news subs...
<: Yes.
...between Q3 of 2016 and Q1 of 2017.
Yes.
Yeah. Are you suggesting that the churn on that is exactly as you expected? And how much success have you had getting them up to a higher rate, if not the full rate?
Yes. Yes.
It's a little hard to imagine a 50% discount went easily to 100% without any friction.
Yeah.
So, that's question one.
So, let me do that. And, I think, it's a three-part question. So, first, I will say, I think, a big part of the positive story of the year in subs has been churn and retention. So, in general, we are retaining the election cohort on an annual basis better than we expected. And churn, month-over-month has gone down significantly for the election cohort. And even if you go back 18 months, it's a very positive story. So, essentially, news subscribers are retaining better than previous cohorts, generally, and specific to the election.
On step-up pricing, we have seen a very positive result and we are now well into – I think, we've got four months now of a huge number of people stepping up from 50% off to full price.
I think it's quite important to say that that actually a large proportion of subscribers will take the full price rise and have done, yeah.
And have. Yeah. And have done that. So, actually the vast majority have. For the much more minority who haven't, we have step-up pricing. We have a number of things that we do in our call centers. And we also have with Cooking and Crosswords, now, through additional things to offer them. So, all to say that is going very, very well. I think, you're also asking the question then why are you not seeing a bigger bump in ARPU, and I want to address that.
There are two things going on there. In 2016, we still had, not a majority, but a meaningful percentage of the base who were coming in, coming in on shorter term offers, so like $0.99 for four weeks, then step-up to full price. That means you saw those people step up much earlier in the year. So, you're not getting like a total base effect of like a huge number of people jumping up to full price. And we are still – we grew international at an even faster rate than we grew domestic subs and those come in at a lower price and step up to a lower full price. And we also still have a strong business in EDU (00:33:24), and that is a flat price the whole way through.
So, all to say, the decline in ARPU lessened in (00:33:32) , so you saw less of a decline than you've seen in previous quarters. And we think ARPU will be a positive story in 2018, but maybe on a slower timeline than you would think as you account for all the different ways we've brought subscribers.
I would just add a little color. I mean the ARPU sequential from three to four (00:33:52) is virtually flat on the news product.
Yes.
And of course you've got lower ARPUs coming from Crosswords and so on, but the core news product was virtually flat and that's after a series of quarters, where when we're really adding a lot of net adds to the file. We were seeing a decline of almost 10%, so that's behind us. But I would say as well, I mean, ARPU is always a function of how many new customers you're bringing on the file.
Right.
And so it's not always a bad story. It's often a good story.
Yes.
Okay. Terrific. Your mention of international subs. It was my second question. Is that up to 20% of total, and where do you see that going over the next couple of years?
I think it's at 14%. Jim is checking just to make sure that's accurate. I'm getting a thumbs up. It's at 14%. I will say it grew little bit faster than domestic. But, obviously, it's still a small percentage of the total base, which explains the rest of the numbers. We are very optimistic about our ability to grow internationally, and I would say the efforts we've made particularly in English-speaking markets outside of the United States, Canada, the UK and Australia have proven quite effective. And you will see us continue to press on those markets and broadening that group to other markets as well.
Great. Thank you.
Thank you. And the next question comes from Craig Huber with Huber Research Partners.
Yes. Good morning. Just a few questions. Maybe I'll start with the move from 10 free articles a month down to 5. Can you just give us a sense, what percent of your, let's say, last year of unique visitors were in that cohort of 5 to 10 who were not paying...
Yes.
...but reading 10 articles a month? Was that like 10% to 20% of the total unique visitors?
I won't give a number but, I'll say, it's a small percentage. So, that the interesting thing that we don't get asked right, while (00:35:57) we think we should, is how many of our subscribers actually turn our pages. And, I think now, it's at least half of our pages turned and turned by subscribers. So, we have a huge audience of deeply-engaged paying users. That's, I think, also why we are still growing digital advertising. But the answer on how many people do you lose is modest. And I want to say we modeled it and expected it to be modest in terms of return rate and page views. And the reality is living up to what we modeled.
Maybe you can give us (00:36:39) a little sense, the 700-plus-million-dollars of cash on the balance sheet, you've cleaned up your pension plan obviously here. What's sort of the plan going forward with that cash in the balance sheet, potential share buyback or how you sort of think about that?
I would say, first, as I said in my remarks, we officially made that commitment to essentially pay down and take out the sale-leaseback transaction. That will be a $250 million used and that will take place in 2019. Look, it's a topic we continually look at. I would say, we feel pretty good about the balance sheet. I think it served us well during this pretty significant transition. And we will continue to look at the dividend level, we'll continue to look at the best way to deploy that capital.
I will say, as well, I think part of the calculus becomes tax rate as well, I mentioned that, tax rate coming down will also enhance cash flow. I think, the building rental income will enhance cash flow. So, we feel pretty good about the balance sheet, although I do think – and we'll continue to keep that under close watch and the board and the finance committee do that regularly. But, I don't have much more to add to that today, but when you think about the business longer term, and the business and I think as I just mentioned, tax rate, building rental income, interest expense, post-sale-leaseback transaction goes down by $25 billion of pre-tax cash flow.
So, there were a lot of things that are working well from a kind of a business cash flow point of view. And we'll keep a close watch on that, and that's – I'm not sure I have much more to add than that.
And just got a couple of things to add from me. And the first thing, as you know, we, over the last couple of years, have acquired some companies and one of some scale, Wirecutter. We're very pleased with the progress with Wirecutter, and we're very pleased in particular the way it added to our content capabilities and the synergies and our ability to use Wirecutter effectively on The New York Times assets, to use The New York Times to help build Wirecutter's audiences and the revenue growth we've seen from that.
Also, our ability as a company to effectively manage Wirecutter to – as it will both, get the benefits of integration, but also the benefits of some separation between The New York Times and Wirecutter has involvement to think that acquisition, not of very major strategic asset, but of assets which help enrich and broaden our content offering and help us extend the offering we can make to subscribers, means that we do not rule out the idea of further investment to grow our business. And, obviously, when we think about our balance sheet, that's one of the things – our capacity to do that is something we bear in mind.
I want to say, just to reinforce what Jim said, is that there a number of things going on, a significantly reduced tax rate and rental income being two important items, but not the only items on the list, which means that we think that free cash flow is going to be very strong over this next period. We think that taking a relatively conservative view of the balance sheet has served the Company well over this last period. But I've got no doubt that the question of the balance sheet will rise up the agenda for us and for all our board over the coming years.
Thank you for that. And I also want to ask, can you just remind everybody with your change at your headquarters building in terms of collapsing down the number floors that you're actually using in your building, how many square feet, how many floors that free up for you guys to rent market rates out there?
We are – in my remarks I said, we've already entered into a long-term lease for four floors. There are three floors that are still being marketed. We see good interest in that. They will take a little bit of time, but we're confident we'll be monetizing those, we think before the end of the year. That will add to the seven floors we already were getting a rental income stream from. So we will then have 14 floors in total, generating rental income.
And then also your CapEx number just for the maintenance CapEx, once you get to these three big projects you kind of talked about earlier, (00:41:17) maintenance CapEx people roughly should think about for, say, 2019 forward?
Well, meaningfully less than what you'll see in 2018. So, we'll be still with out – look I think about the business as we get past next year as somewhere in the $30 million to $40 million range is a more normal level. And...
Yeah.
... we are in a period where we went many years without having to invest in our College Point. Yeah. We'll be investing there – in addition you may have heard or read that we will be increasing our commercial printing work in that plant throughout – this year, late this year. That will require some capital. But I do think we will see a fairly big step down after 2018 to a more normal level.
Yeah. So, we are essentially we're in the middle of a kind of like a midlife refresh of technology at College Point. I associate that with the deal we've announced with Newsday, which is an advantageous deal in terms of both, full utilization of the plant and also I think a very intelligent use of our and Newsday's capability for the effective distribution of The New York Times in Long Island and around New York. And (00:42:34) Newsday itself. So, we're trying to get the most out of that facility, but also to modernize it. (00:42:40), it now needs some changes. But we will definitely revert to a lower capital figure once that's done.
And my final question if I may. Just a little bit more meat if you would on the slowdown in digital ad revenue you're seeing in the fourth quarter and also this upcoming first quarter here...
Sure.
... (00:42:59) talk about there on the pricing side in particular besides just a tough comps year-over-year and but anything else (00:43:01) you could help us with. Thanks.
Sure. There are aspects of it that are price story, but that is less important than the things I've said before, which I'll just tick off again. Comping against the media part of our business is still, meaning display advertising, is still supply-driven and we had huge audience growth in the fourth quarter of 2016 and in the first quarter of 2017. So, there is just some supply comp there.
And we had fewer new product innovations in the market in the fourth quarter and we knew that, which is why we guided the way we did in the last call, and you'll feel the effect of that through the first quarter. But by contrast, we have a lot of new product and sort of innovations that marketers buy around.
And just buy (00:44:03) product, you mean, in this case, you mean, advertising-related products, which can be sold.
Yes. Yes. And I'll be specific. We have a couple of new data products, which are just launching now, which add value to the actual digital advertising supply and are compelling for marketers. And we also have new areas of coverage. We have new product innovations. A number of things coming around, which we build large partnerships with marketers. And that's why we're suggesting a growth year – if (00:44:37) a slower fourth quarter and first quarter. Was there another question in there or did I get that?
There's nothing in the programmatic side or pricing that you want to call out...
Oh, pricing, right. So, I'll say, generally, the two things that are sort of interesting and important about pricing, we are still seeing just more sales on mobile. And mobile in general commends (00:45:03) a lower price, trades at a lower CPM. My guess is that The Times still has very favorable CPMs in mobile, compared to the rest of the industry. But in general, mobile CPMs are meaningful percentage lower than desktop and we still have more audience coming to mobile. We also have more ad supply on mobile. So, that basically means you have to sell more to make the same amount of money as you see the shift from desktop to mobile.
It's really interesting though if you think about the value of our supply. It trades as you would expect in the market. So, in places where we have limited – much more limited supply like the desktop, CPM has held up very strongly. And in some cases in our direct business, actually went up in 2017. And there are a number of things we're doing in both, desktop and mobile to sort of combat price pressure and the one – the two that I think are most interesting are, we've had a lot of success changing our ad canvasses. So, those flex frame (00:46:10) family of ads means bigger and more beautiful, more compelling ads.
We keep rolling out new products in that family and that has been very good for business and we are adding. We introduced two new data products this month that we layer on top of those. One is a capability, one is actually a product that is perspective (00:46:31) targeting that lifts CPM. And those things we expect will help us combat price pressure in 2018.
That's very helpful. Thank you. And, Jim, best of luck to you and thanks for help over the years as well. Thank you.
Thanks, Craig.
Thank you. And the next question comes from Kannan Venkateshwar with Barclays.
Thank you. Just a couple. First on the gross adds trajectory, Meredith, I wanted to understand, I mean, you mentioned that churn has actually improved, especially in some of the more recent cohorts. Just want to understand how the funnel is evolving from a gross add perspective, because that would imply that gross adds relative to past cohorts are slightly weaker.
And then secondly, on the on the real estate side, Jim, I just wanted to understand if the notice that you gave in the real estate, is that something that was as planned or what was the catalyst for that particular notice that you just announced, because it's due in 2019? So, the (00:47:34)
We'll do the second one first, Jim, on the...
There's a date within the agreement where we are required to give notice on our intent (00:47:40), and we did it by that date.
Okay. Thanks.
I view that – I must say, I view that as a nonevent, the underlying asset value relative to the amount we'll pay of $250 million is a gigantic mismatch. There's no scenario why we wouldn't have done it...
Great. (00:47:53)
...because it is required under the agreement.
Yeah.
(00:47:55) I agree. The decision is a no brainer, because – but essentially for this payment of $250 million, we get complete ownership of the building back as was always envisaged. And therefore a very large asset, the building comes on to our balance sheet.
Yeah.
Can I ask a follow up on that before – Meredith, you're part of the question. So, on the debt, Jim, I think if I recall correctly, in the past you've said that it was never an intention to be fully debt free, but this will make you fully debt free. So, Mark, I don't know how you think about the balance sheet going forward, but should we think of that as the steady state?
No. I think you should see – as I said earlier, Kannan, I think you should – what you should see is that we recognize that given the combination of positive impacts on free cash flow and the ending – the winding up of this sale and leaseback. So, it's certain over the coming months to me that the issue of the balance sheet is going to rise up our agenda. We haven't got anything to announce today, and I don't want to give a timeframe for it. We think that holding a relatively conservative balance sheet has made sense for the Company. And we continue where we have a long range strategy for the Company. On the other hand, we have never said that we think that the right answer of the (00:49:31) company is necessarily to be to be debt free and I'm sure we'll be talking with the board over the coming months and years about it. So it's certainly an issue (00:49:40). We don't have anything to say any more than that today.
And on the starts issue, I would say if you look at the period prior to the election, you will see a meaningful increase in starts in terms of what we've just done in the fourth quarter and what we expect to do versus the period sort of before the frenzied (00:50:04) news cycle and around and just after the elections.
You're also seeing – and I've said this before when I talked about the focus we've had on International. You're also seeing us push into new markets and that is that sort of more virgin territory for us. So we are learning how to execute more effectively there. But I do think – and I say this often and I still mean it. We still have quite a bit of room to improve on how we execute versus different target audiences. And I think based on some of the new marketing tactics that we'll be deploying across the rest of this year, you will continue to see healthy starts.
Thanks. Sorry. Jim, if I could just follow-up on the tax rate question, is it fair to assume that the booked tax (00:51:01) and the cash tax rates are closely aligned?
Yes. Yes, that's generally the case. I will say, however, and I've said for a very long time, our historical rate was 40% or rarely is there ever quarter worth 40%. But I will say, for every $1 (00:51:16) of profit we generally earn we pay, we will pay a tax now not at 40%, but a high-20% rate with sort of a lumpy stuff running through the tax line.
Okay. Thank you. And, Jim, all the best.
Thank you.
Thank you. And as there are no more questions at the present time, I would like to turn the call 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.
Thank you. This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.