In the first quarter of 2018, The New York Times Company (NYSE:NYT) continued to sign up hordes of digital subscribers, while controlling costs and mitigating declines in traditional print advertising. These factors, plus a couple of "below the line" items (which we'll discuss in this article), led to tangible improvement in the Times' net income and earnings per share (EPS):
The New York Times' earnings: The raw numbers
|Metric||Q1 2018||Q1 2017||Year-Over-Year Growth|
|Revenue||$413.9 million||$398.8 million||3.8%|
|Net income||$21.9 million||$13.2 million||65.6%|
|Diluted earnings per share||$0.13||$0.08||62.5%|
What happened with The New York Times this quarter?
Subscription revenue of $260.6 million rose nearly 8% against the first quarter of 2017. The advance was propelled by digital subscriptions. Digital-only subscription revenue jumped 25.8% to $95.4 million. Within this category, digital news product revenue improved by 24.3% to $90.6 million, while other subscription revenue (which include the paper's crosswords and cooking content products) increased by 63.4%, to $4.8 million.
Advertising revenue declined 3.4% versus the prior-year quarter, to $125.6 million. Print advertising dipped just 2% to $78.9 million, highlighting the paper's efforts to stem losses in traditional advertising.
Digital advertising actually underperformed print advertising during the quarter, slumping 5.9% to $46.7 million. Management blamed the slowdown on the "lumpiness of [our] growing strategic partnership business" as well as a tough comparison against the peak advertising interest in the months that followed the 2016 presidential election. The company is projecting further weakness in digital advertising in the second quarter of 2018, followed by a return to positive year-over-year comparisons by the third quarter.
The newspaper tallied $27.7 million in "other" revenue, an advance of 4.9%. A decline in live events revenue undercut growth in the organization's product review website Wirecutter, and expansion in its commercial printing business.
The Times maintained a tight rein on operating expenses in the first quarter of 2018. Operating margin improved by 130 basis points versus the first quarter of 2017, to 8.2%. Impressively, the company continues to develop and market new content "verticals" and attract new subscribers, while holding selling, marketing, and personnel expenses in check.
The New York Times' huge double-digit improvements in net income and earnings per share, as shown in the table above, received some help from two items "below the line" -- that is, below the operating income line on the company's income statement. First, a reduction of long-term debt in 2016 and 2017 translated into lower interest expense of $4.9 million in the first quarter, versus $5.3 million a year ago.
Second, the paper's income tax burden has diminished due to the recently enacted U.S. tax legislation. Last quarter, management told investors that annual income expense would drop from roughly 40% to the high 20% range. Thus, a lower tax rate coupled with a tax benefit from stock-based compensation resulted in income tax expense of $5.2 million in the first quarter, versus $10.7 million a year ago.
What management had to say
In the Times' earnings press release, CEO Mark Thompson highlighted the company's robust digital business, as well as the quality of the digital subscription base:
In the first quarter, we saw increases in revenue and overall profitability and continued solid growth in our digital subscription business. The strong demand for the high quality, independent journalism that The Times produces resulted in a 139,000 net increase in digital-only subscriptions for the quarter. We're seeing good retention of new cohorts of subscribers and continue to believe there is a big opportunity to further grow this increasingly important part of our business. Subscription revenues accounted for nearly two-thirds of the Company's revenues and, as we continue to adapt our subscription model and introduce new products, we expect that trend to continue.
Gaining sticky subscribers -- that is, new customers who decide to renew initial subscriptions -- is vital as the company's digital subscription surge will eventually normalize. The Times has recently allocated additional resources to holding on to subscribers. For example, in the last two years, the company has tripled to 25 its team of employees who work solely on retention.
Casting a glance to the second quarter, management projects a year-over-year increase in total subscriptions in the mid-single-digit range. As noted above, advertising revenue is expected to decrease next quarter. Management has pegged this drop in the low teens in comparison with the second quarter of 2017. Finally, the Times will continue to exercise cost discipline, as executives project that operating costs will increase in the low single digits next quarter.