The New York Times Company Third Quarter 2020 Earnings Conference Call November 5, 2020

Harlan Toplitzky

Thank you, and welcome to The New York Times Company’s third quarter 2020 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, and our actual results could differ materially. Some of the risks and uncertainties that could impact our business are included in our 2019 10-K, as updated in subsequent quarterly reports on Form 10-Q.

In addition, our presentation will include non-GAAP financial measures, and we have provided reconciliations to the most comparable GAAP measures in our earnings press release, which is available on our website at investors.nytco.com.

With that, I will turn the call over to Meredith Kopit Levien.

Meredith Kopit Levien:

Thank you, Harlan, and good morning, everyone. As I said when I was named CEO in July, it’s the honor of a lifetime to lead The New York Times Company and to support the work of our extraordinary newsroom. Let me start by thanking our shareholders and the investor community for their confidence as we continue to evolve from a legacy print newspaper business into a growing, subscription-first digital enterprise.

I assumed my new role in the same quarter that our digital-only subscription revenue overtook print subscription revenue for the first time. Digital subscriptions are now not just the company’s fastest growing and most important revenue stream, but also well on the way to becoming our largest. That’s a milestone many years in the making, and a testament to the enduring nature of our strategy.

Since this is the first conversation I’m leading with you, I’m going to take a few minutes to reiterate our strategy and share my view of our long-term opportunity. I’ll also try to put that all in the context of this historic news moment.

Now, you’ve heard us talk for some time now about an addressable market of 100 million curious people worldwide who are likely to pay for the type of English language journalism The Times produces. We increasingly believe the market is at least that large; there are nearly a billion people around the world who read news digitally, and more than 80 million who pay for digital news today. It’s easy to assume that more will do so in the future as people get more comfortable paying for digital subscriptions generally, and as the supply of advertising-first alternatives continues to be under pressure.

We’re confident that the market is there and also in our ability to penetrate a large portion of it. Our model creates a virtuous cycle: A large newsroom, made up of the world’s best journalists; a widely recognized and trusted brand; and a differentiated digital product enables us to attract and retain more subscribers. The larger our subscriber base becomes, the more we can invest in our journalism and standalone products, and the more we can spread our fixed costs across a wider base of users. That means strong unit economics that improve as we scale, with further contributions from advertising, licensing and affiliate fees.

Given that we are in the midst of a historic and thus-far inconclusive election, I want to talk for a few minutes about our journalism, and how its differential value fuels our strategy.

Let me first say how proud I am of our newsroom and the manner in which they are covering the election — reporting deeply on the candidates; chronicling the key issues facing the country; illuminating the views and experiences of voters; and tracking the race itself.

If you spent the last few days immersed in our app, you’re not alone. Yesterday our coverage brought 120 million readers to The Times, and more than 75 million the day before. And they are coming not just to read, but also to experience live coverage in text, multimedia, interactive graphics and audio.

At the same time that we have reporters covering the election on the ground across the country, we’ve deployed a vast number of journalists to also report on the still-surging pandemic. That effort continues to yield one of the most comprehensive data sets available to understand the virus’s spread, and in particular, its exacerbation of underlying inequalities.

And even while much of the world’s attention remains focused on politics and the pandemic, The Times has worked to keep other important issues in the public consciousness, from hunger in America -- which made up the entirety of a recent issue of our Sunday Magazine -- to the ongoing conflict between Armenia and Azerbaijan.

This journalistic range plays an important role in our business. Which brings me to one of the biggest questions I hear from many of you: what do we believe happens to the business if or when the news cycle changes? First, let me say it’s hard to imagine we’re entering a quieter period for news anytime soon. Nor do we expect a change of pace in the fundamental issues that demand understanding, from technology reshaping our lives; to racial and wealth inequality; to the rise of China; and

the effects of climate change. People will continue to turn to The Times for understanding when things feel less certain.

We’re also not reliant on any single story or topic to drive our growth; in fact, the breadth of our core news report is both a differentiator and a driver of our business. Our app this week offered both the best real time view of the election and the virus — and also a guide for how best to distract oneself from both.

Our user data tells us that each additional topic someone engages with increases their likelihood of subscribing by 50 percent. And, while politics is an important topic for our readers, around 80 percent go beyond politics to read other subjects each week.

We’ve also begun to prove that The Times has a bigger role to play in people’s lives. Games and Cooking together have nearly 1-point-4 million subscriptions, and we’ll continue to invest significantly in those products, and other efforts like Wirecutter and Audio.

It’s worth noting that over time, the model is becoming more resilient to big swings in the news cycle. We saw that after the 2016 election, and we see it after other big news events -- net subscription additions go up significantly, and after they crest, they settle in at a higher point than before in part because with each passing quarter and year, we get steadily better at executing.

With that said, a lot of hard work remains in order to make the product and our underlying tech platforms match our ambitions, and at least some of that will require additional investment.

This has been an extraordinary year so far for net subscription additions. We ended the third quarter with approximately 6.9 million total subscriptions, and crossed the 7 million mark already in the month of October, which means we’ve added more than 2 million digital subscriptions in the last year.

Although we have a lot of confidence in our ability to continue to grow, 2020 is an unprecedented year and we don’t expect to repeat its results. That said, we are well on our way to surpassing the 10 million goal we had initially targeted to hit by 2025.

Turning to advertising -- our digital results, while down, were slightly better than we expected.

As we’ve told you for the last year or so, we’ve been steadily tilting the business back to the unique value of our media. Our first-party audience data used in privacy-forward ways has enabled pockets of growth in direct sold media. And it’s also now the foundation of a new thought leadership platform, Pivotal, which launched during the quarter to help marketers consider their creative and brand strategies in the context of broad consumer insights. Audio advertising has also been an area of continued resilience driven by The Daily. And in The Third Quarter, we entered into a multi-year, augmented reality collaboration with Facebook

and we advanced our work with Verizon on 5G with the launch of our first 5G franchise, “From Here.”

As we’ve said in previous quarters, the advertising business continues to be important to the Company’s economics but we do not expect it to be a significant driver of growth in the near term.

Before I hand it off to Roland, I want to take a moment to thank my Times colleagues working across news and business. I’ve told you what makes us confident in our strategy, but I’d be remiss if I didn’t say that our ability to execute that strategy lies in the talent, passion and commitment of the 4,600-plus Times people, who’ve been working tirelessly in unprecedented circumstances. I couldn’t be prouder of how they've shown up for the mission, for our business and for one another in this intense year.

Over to you, Roland.

Roland Caputo

Thank you, Meredith, and good morning.

As Meredith said, we remain pleased with the progress we are making as we continue to execute against our strategy; and Q3 was yet another strong quarter for the Company.

Adjusted diluted earnings per share was 22 cents in the quarter, 10 cents higher than the prior year. We reported adjusted operating profit of approximately $57 million dollars, which is approximately $13 million dollars higher than the same period in 2019.

We added 275 thousand net new subscriptions to our core digital news product and 118 thousand net new subscriptions to our standalone digital products, for a total of 393 thousand net new digital-only subscriptions. Each of these figures represents the highest third quarter net add numbers ever. Those net adds brought us to over 6 million digital-only subscriptions at the end of the quarter, including 775 thousand Games subscriptions and nearly 600 thousand Cooking subscriptions. We made two significant changes to our model from the prior two quarters: we restored the paywall to the vast majority of the site, leaving only the most critical coronavirus coverage outside of it and we returned to a normal promotional cadence of $2 per week during non-sale periods and $1 per week when on sale.

Total subscription revenues increased approximately 12-and-a-half percent in the quarter, with digital-only subscription revenue growing 34 percent to $155 million dollars, making Q3 the first full quarter that digital-only subscription revenue exceeded print subscription revenue. The acceleration in the rate of sequential quarterly digital subscription revenue growth from 30 percent in the second quarter to 34 percent in the third quarter is largely a result of three factors: First, the number of new subscriptions we have added in the past year;

second, on-going strength in retention of the $1 dollar-per-week promotional subscriptions who have graduated to higher prices; and, finally, the positive impact from our first-ever digital subscription price increase, which began late in the first quarter.

Digital news subscription ARPU for the quarter declined approximately 11 percent compared to the prior year and approximately 3 percent compared to the prior quarter, largely consistent with the quarterly rates of decline we’ve reported for the last year. The newly acquired subscriptions, mostly on the $1 dollar per week promotion domestically and at deeper promotional rates in many areas outside of the U.S., continued to more than offset the benefits from both subscriptions graduating from their introductory promotion, as well as from price increases on our more tenured, full-price subscriptions. ARPU related solely to domestic news subscriptions declined close to 9 percent versus the prior year and 3 percent versus the prior quarter.

Our digital pricing strategy is yielding strong results and we expect this to continue over time. This strategy utilizes the $1 dollar per week, year-long introductory price point to stimulate demand and increase conversion among more casual readers whose willingness to pay is initially lower. At the conclusion of the promotional period, these subscribers move to one of two higher price points: either full price, or in cases where data suggests their willingness to pay remains lower, a mid-point increase before moving to full price at the end of the second year. As we’ve said in the past, the $1 dollar per week subscriptions continue to retain at nearly the identical rates as our historical 50 percent off promotion now more than 25 months after introduction. Our digital pricing strategy also includes a price increase for our most tenured subscriptions. In September we resumed rolling out this price increase on our most engaged and tenured subscribers, who garner the most value from the product and whose willingness to pay is highest. Churn on the initial 690 thousand long-tenured subscriptions who received a rate increase earlier this year has been significantly lower than we expected and has generated more than $11 million dollars in incremental revenue for the Company through the third quarter, almost all of which falls directly to the bottom line.

Given the price increase on our tenured digital subscriptions and the impact from subscriptions graduating from discounted promotions, we should begin to see a slight moderation in the rate of ARPU decline in the fourth quarter. As we look forward, we expect our digital pricing strategy to provide a tailwind to ARPU throughout 2021 as approximately 1-point-6 million digital news subscriptions graduate from their $1 dollar a week promotional discount. Additionally, we expect approximately 650 thousand newly tenured subscriptions will see a price increase.

On the print subscription side, revenues were down nearly four percent largely due to a decline in single-copy and international bulk sales. Revenue from domestic home delivery print subscriptions grew 2-point-5 percent in the quarter as a home delivery price increase implemented early in the year more than offset year-over-year subscription declines. Total daily circulation declined 16 percent in the quarter compared with prior year, while Sunday

circulation declined 6-point-2 percent. The widespread business closures, increased remote working and reductions in travel as a result of the pandemic contributed approximately seven percentage points to the daily copy decline and 2 percentage points to Sunday.

Total advertising revenues declined approximately 30 percent in the quarter, as both digital and print were severely impacted by lower marketer demand during the pandemic. Digital advertising declined approximately 13 percent in the quarter compared with the prior year. This result is somewhat better than the guidance we gave on our second quarter earnings call, largely as a result of higher levels of spending from our large deals with Verizon, Facebook and Mastercard. Print advertising declined approximately 47 percent with luxury, entertainment, media and home furnishings categories hit hardest.

Other revenues declined approximately two percent compared with the prior year, to $47 million dollars, primarily as a result of fewer television episodes, as well as lower revenues from commercial printing and live events. These declines were partially offset by licensing revenue related to Facebook News and an increase in affiliate referral revenue from Wirecutter.

Adjusted operating costs decreased nearly 4 percent in the quarter. Cost of revenue also decreased approximately four percent as lower print production and distribution costs and advertising servicing costs more than offset higher digital content delivery and journalism costs. Sales and marketing costs decreased approximately 21 percent largely driven by lower media spend and advertising sales costs. Please note that we do not view third quarter marketing expense as representative of future spend given the special circumstances under which we were operating in the quarter. In fact, we have already begun restoring marketing spend to more normalized levels as we entered the fourth quarter. Product development costs increased by approximately 28 percent largely due to growth in the number of engineers employed. We plan to continue adding to headcount in this area over the next 12 to 18 months as we expect to continue to lean into our investments here and in our journalism to drive growth further.

Our effective tax rate for the third quarter was 17-point-8 percent, which includes a tax benefit from stock price appreciation on stock-based awards that settled in the quarter. On a going forward basis, we continue to expect our tax rate to be approximately 26 percent on every dollar of marginal income we record with significant variability around the quarterly effective rate.

Moving to the balance sheet, our cash and marketable securities balance ended the quarter at $800 million dollars, an increase of $43 million dollars compared with the second quarter. The company remains debt-free with a $250 million dollar revolving line of credit available. The consistently conservative approach we have taken in managing our balance sheet in tandem with the continued strong results produced by our subscription-first business provides the financial flexibility and confidence to continue pursuing our growth strategy even as we

manage through the economic fallout of the COVID-19 crisis.

Subsequent to the quarter close, as part of our continued effort to reduce the size and volatility of our pension obligations, we entered into a transaction with an insurance company to transfer a portion of our future benefit obligations and annuity administration, allowing us to reduce our overall qualified pension plan obligations by $235 million dollars. With this transaction, which was funded from plan assets, we expect to record a NON-CASH pension settlement charge of approximately $80 to $85 million dollars in the fourth quarter.

Let me conclude with our outlook for the fourth quarter of 2020, which is based on our current knowledge and assumptions and could be impacted by the evolving effects of the pandemic:

Total subscription revenues are expected to increase approximately 14 percent compared with the fourth quarter of 2019, with digital-only subscription revenue expected to increase approximately 35 percent.

Overall advertising revenues are expected to decrease approximately 30 percent compared with the fourth quarter of 2019 and digital advertising revenues are expected to decrease in the mid-teens.

Other revenues are expected to decrease approximately 15 percent, as a result of fewer television episodes and lower revenues from live events.

Both operating costs and adjusted operating costs are expected to be flat or decline in the low-single digits compared with the fourth quarter of 2019 as we carefully manage non-essential spending while continuing to invest in the drivers of digital subscription growth.

And with that, we'd be happy to open it up for questions.

Harlan Toplitzky

Thank you for joining us this morning. We look forward to talking to you again next quarter.