The New York Times Company (NYSE:NYT) reported modest top-line growth and significantly higher year-over-year net income and earnings per share in the second quarter of 2018. The company's results, issued Wednesday, evidenced a weaker growth rate in subscription revenue, yet, as we'll discuss below, this is partly through management's design.
The New York Times' earnings: The raw numbers
|Metric||Q2 2018||Q2 2017||Year-Over-Year Growth|
|Revenue||$414.6 million||$407.1 million||1.8%|
|Net income||$23.6 million||$15.6 million||51.2%|
What happened with The New York Times this quarter?
Subscription revenue rose 4.2% against the second quarter of 2017, to $260.6 million. Digital-only subscription revenue improved by 22.6% to $98.7 million. This is slightly off the pace of the first quarter's growth rate of nearly 26%.
Within the digital subscriptions category, "Other product subscriptions" revenue advanced by 60.2% over the comparable quarter, to $5.2 million. Other subscriptions are comprised primarily of the paper's Cooking and crosswords stand-alone content services.
In terms of subscribers, digital-only subscriptions improved by 24% to 2.9 million subscribers at quarter-end. This also represented a slower growth rate vis-a-vis the first quarter of 2018, in which digital subs grew by 25.5% year over year.
Last quarter, management had signaled the slightly lower growth rate of digital subs revenue, through guidance that called for a mid-single-digit rise in total subscription revenue. At 4.2% expansion during the quarter, subscription revenue narrowly missed management's expectations.
Easing subs growth is partly by design, as management has pulled back from some of the promotional activity utilized to draw in new subscribers in the quarters following the 2016 presidential election. Increasingly, the company is focusing on profitable expansion versus aggressive subscriber additions.
Management cited at least one other factor crimping subscriber growth: a reduction in marketing spend with Facebook during the second quarter, due to concerns over the way Facebook intended to categorize the company's marketing messages. The paper has indicated that current favorable discussions with Facebook will likely result in higher marketing spend on the social platform in the third quarter.
- Advertising revenue dropped 10% to $119.2 million over the last three months. Management had cautioned investors in its last report to expect a dip in ad revenue due to the timing of digital advertising partnerships. Digital advertising revenue fell 7.5% to $51.0 million during the second quarter.
"Other" revenue jumped by 40% over the prior year to $34.7 million. The advance was propelled by revenue from the company's product referral website Wirecutter, as well as higher rental income from the leasing of four additional floors at the company's headquarters.
- Operating margin rose nearly 3 percentage points to 9.6%. However, after removing $17.0 million in excess severance costs from the second quarter of 2017, operating margin actually dipped by roughly 1 percentage point, to 5.5%. The variance was due to higher production expenses, driven in part by the impact of tariffs on newsprint costs.
What management had to say
During the company's earnings conference call on Wednesday, management discussed its various investments to drive subscriber growth. While traditional marketing spends certainly play a vital role, new content creation also figures prominently in the company's subscription strategy. As an example, executives pointed to the paper's podcast The Daily, which has become one of the most-downloaded podcasts among U.S. audiences. Here are CEO Mark Thompson's comments on the value of generating compelling content across evolving media platforms:
[T]he other way I think about [marketing versus investing] is in the context of the Daily podcast, and indeed, the new TV show. These are, firstly, intended to be margin-generating profitable activities for the company. But they also have the effect of introducing the Times and Times journalism to potentially significantly new audiences. The audience to The Daily is a remarkably young audience for any news product, any media. So this is a way of reaching out with our messages and engaging people with Times journalism, in a way which is intrinsically profitable rather than being a marketing cost.
As we look ahead to the next three months, the paper expects revenue to expand in the mid single digits in the third quarter, with digital-only subscriptions growing in the high teens. Advertising revenue is slated to dip in the low single digits; the relatively higher performance against the first half of 2018 will be supported by an anticipated rise of 10% in digital advertising revenue. Other revenue is expected to continue its dynamic growth and muster a leap of 50% against the third quarter of 2017.
As for bottom-line results, the company doesn't provide an outlook for net income or EPS. It does, however, project the big picture on the expense side of the ledger: Management has outlined a 10% increase in operating costs next quarter, due to commercial printing growth and a step-up in marketing costs in the back half of the year.