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Essential Trends to Watch When The New York Times Reports Earnings

By Asit Sharma - Feb 4, 2018 at 8:33AM

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The company behind the award-winning paper has generated headline-worthy stock performance over the last 12 months. Can this business news story remain fresh after earnings?

Long-time advocates of investing in the company behind the staid journalistic institution that is The New York Times are finally enjoying some company. Shares of news publisher and content provider  The New York Times Company (NYT 2.51%) generated a total return of 40% last year. More impressive, as of this article date, the company's stock has tacked on another 26% in the month of January.

With such market interest and given the quick recent run-up, it's possible that the paper's fourth-quarter 2017 earnings report, to be released on Feb. 8, will cause shares to retrace -- regardless of how positive the numbers look. Below, let's briefly discuss essential trends that investors should follow in order to remain focused on the big picture.

Digital subscribers, and the growth in total subscription revenue

As shareholders are undoubtedly aware, overwhelming interest in the Trump administration has rewarded The New York Times with a multiquarter surge in digital subscriptions. Most recently, in the third quarter of 2017, the Times reported a 44% leap in digital-only subscription revenue over the prior-year quarter, generated from a 59% increase in digital-only subscriptions. 

Digital "subs" now constitute the primary driver of total subscription revenue growth, which is arguably the most important metric to follow in the company's earnings. Through the first nine months of 2017, total subscription revenue increased 13% to $739.1 million.

Last quarter, management provided a fourth-quarter 2017 projection of high-teens growth in subscription revenue, including the impact of an extra week versus the prior year.

Yet when removing the extra week, on an apples-to-apples basis, the company expects total subscription revenue to improve just 10%. This slower rate of growth is due to the difficult comparison against the election-year fourth quarter of 2016, in which digital-only subscriptions jumped 46%. 

Close-up of a laptop, steaming cup of coffee, pair of glasses, and newspaper on desk.

Image source: Getty Images.

An offset to print advertising decline

At a little less than one-third of total revenue, advertising sales still play a significant role in the Times' revenue puzzle, although they've deteriorated in recent years. Through the first three quarters of 2017, advertising revenue dropped 5%, and that pace is expected to accelerate in the final quarter -- the company has warned investors to expect a high-single-digits retracement from the previous year.

As in prior quarters, the total negative shift in fourth-quarter advertising will be less important than the relationship between digital and print advertising. Print advertising at present remains slightly larger than its digital counterpart. The Times had booked $221.8 million in print advertising sales through the first nine months of 2017, versus $154.1 million in digital ad sales.

Yet while the print advertising top line slumped 16.2% during this period, digital advertising climbed 17.5%, buoyed by the company's thriving digital platform. For the fourth quarter, investors should check to make sure that the digital advertising trend remained positive. 

Investing in noncore revenue

In November, I discussed the strategies The New York Times can implement as its subscription boom inevitably slows, and subscription intake normalizes. These strategies are: exploiting revenue opportunities such as the company's burgeoning New York Times Crosswords subscription service, maximizing noncore revenue through product referral websites like the Times' Wirecutter site, and engaging in modest bolt-on acquisitions.

When the company reports earnings, investors can expect to hear management discuss initial results for its newest content vertical, the New York Times Cooking subscription service. Potentially, executives will clue investors in on upcoming services, as the newspaper created an entire division last year devoted to launching products similar to Crosswords and Cooking, to capitalize on its brand trust and exploit high-interest areas within its subscription base.

I'm eager to learn if management will continue to seek small, but earnings-accretive (i.e. adding to earnings) acquisitions in the mode of Wirecutter, a fast-growing revenue stream that in its present format resulted from two separate 2016 acquisitions.

Higher free cash flow courtesy of brisk subscription growth would suggest that the company has ready money once it identifies a suitable purchase. Through the first nine months of 2017, the organization increased its cash balances by nearly 1.5 times, to $245 million: Look for the company's balance sheet to show additional expansion in the fourth quarter.

About that January momentum

At the outset of this article, I mentioned the January surge in the company's shares. Much of this boost came early in the month when Facebook announced that it would prioritize news sources it deemed "trustworthy" in the feeds it servers users.  

This action is expected to cull the amount of news on Facebook's site by 20%, which should theoretically benefit providers of high-quality journalism like the Times, as fewer organizations will compete for traffic, opening revenue opportunities for the paper.

I'm not sure how much time, if any, management will devote to discussing this potential content and advertising boon on the company's earnings conference call. But investors' reaction demonstrates how perception of the organization has shifted in a very short amount of time. Where investors once identified the Times with the decline of an industry (print newspapers), it's now viewed as a beneficiary of the growth of content monetization.

This change in the market's assessment of The New York Times' earnings potential has contributed to its handsome stock chart, an ascent which might falter in the near term if growth can't keep up with ever-higher expectations. Thus, it's all the more important for shareholders to focus on the key trends above, and take any immediate speculative price action in context, when the company issues its fourth-quarter report on Feb. 8.

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