HOLD-rated New York Times Co. (NYSE: NYT) has been mired in a business sector experiencing secular decline. To combat weak industry trends, the company has focused on expanding its digital business, migrating print products to the web, and enhancing its visual capabilities. These efforts have generated promising results: digital-only subscription revenues grew 42% in 2017, 27% in 2018 and 31% in 2019, and digital-only subscriptions now total 6.1 million and account for about 37% of total revenue. We note that NYT has managed to grow revenue despite the decline in print advertising. In the near term, we expect that earnings will continue to be driven by subscription revenues, with additional pressure on advertising revenue. It also continues to invest in digital subscription growth, while controlling operating costs with cuts in discretionary spending.
New York Times Co. up from $0.12 a year earlier and $0.10 above consensus. Third-quarter revenue declined 0.4% to $426.9 million, but topped the consensus by $15.0 million as record growth in digital-only subscription revenue helped to offset declining advertising revenues. Growth was driven by new subscriptions, price increases for tenured subscribers, and the transition of promotional subscriptions to higher rates. In 2019, the company adjusted its model and began requiring anonymous users to register after reading a few stories, which made it easier to convert them to paying subscribers. In 3Q20, it added a paywall to most of the website, with the exception of critical coronavirus news. Management noted that the company has retained higher levels of new subscribers from its coverage of major news, and has also been successful in moving new subscribers into higher price tiers following low introductory offers.
Third-quarter adjusted operating profit rose to $56.5 million from $44.1 million, as falling ad revenue was offset by higher digital-only subscription revenue and a decline in operating costs. (Adjusted operating costs exclude depreciation, amortization, severance and pension withdrawal costs.) Management noted that marketing spending is beginning to return to normal levels.
The company does not issue earnings guidance, but did offer a general outlook for 4Q20. It looks for adjusted operating costs to be flat to down in the low single digits based on cuts in discretionary spending. Management expects a 15% decline in ‘other revenue’ in 4Q and continues to expect a tax rate of 26%.
EARNINGS & GROWTH ANALYSIS
The company generates revenue through three segments: Subscription (60% of 2019 revenue), Advertising (29%), and Other (11%).
Subscription revenue rose 12.6% in 3Q to $301.0 million. Digital-only subscription revenue rose 34%, while print revenues fell 3.8% due to a decrease in single-copy sales and international bulk sales. The decline in print revenues was partially offset by higher revenue from home delivery price increases. Total daily circulation fell 16% year-over-year, as hotels and other outlets closed due to the pandemic, and Sunday circulation declined 6.2%. However, the company added 393,000 net new digital subscriptions (growth of 49.6%), of which 275,000 were in the core digital-only news category. Substantially higher website traffic due to the pandemic has boosted digital subscriptions, which have also benefited from promotional subscriptions moving into higher price subscriptions. We believe that the recent acceleration in digital subscriptions reflects increased interest in national political news and in the company’s White House coverage, as well as coronavirus news, along with data-driven adjustments in the pay model and improved results from consumer marketing; however, we expect the strong growth in subscriptions to moderate.
Total 3Q advertising revenue came to $79.3 million, down 30.2%. Print advertising, which comprised 40% of total ad revenue, fell 47%, as the pandemic led to accelerated losses. The worst decline in print advertising has been in the luxury and entertainment categories. Digital advertising, which accounted for 60% of ad revenue, fell 13%. The decline was smaller than expected, however, due to growth in large advertising deals.
Results in this segment were driven by The Weekly, the company’s television series which concluded its first season, as well as by declines in live events and commercial printing.
FINANCIAL STRENGTH & DIVIDEND
In January 2015, the board authorized $101.1 million for the repurchase of Class A common stock. The company has spent $84.9 million and has $16.2 million remaining on this authorization, which does not expire. The company has not repurchased any stock since 1Q16.
MANAGEMENT & RISKS
Meredith Kopit Levien, formerly the company’s COO, succeeded Mark Thompson as president and CEO on September 8.
An enhanced global presence, including the re-branding of the International Herald-Tribune as the International New York Times; video; and games. He also brought on new staff members to lead these initiatives.
The secular trend in advertising is away from newspapers and toward digital. Looking out over the next 10-15 years, online advertising is expected to continue to grow at a low double-digit rate, while the newspaper industry shrinks 3%-5% per year.
To its credit, NYT management has constructed a growing online business within the newspaper industry. Takeout multiples for this business line have run as high as 5-times sales; the current price/sales ratio for the entire company, which is tightly controlled by the founding Sulzberger family, is 1.8.
The New York Times Co. is a multimedia news and information company. The company has a dual-class ownership structure, and the founding Sulzberger family is effectively in control. Hedge funds and activist investors, including Harbinger Capital, ValueAct Holdings, and Carlos Slim of Mexico, have built and divested substantial stakes in NYT in recent years.
They are also trading above their historical average price/sales and price/book multiples.
On November 10, HOLD-rated NYT closed at $38.29, down $0.60.