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Growth Investments Cut Into New York Times' Profits

By Asit Sharma - Aug 7, 2019 at 4:55PM

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The newspaper's second quarter was marked by a drop in profitability, and management warned that a key revenue stream will decelerate in the second half of the year.

The New York Times (NYT 3.70%) reported moderate revenue growth and slimmer profits in the second quarter of 2019, in results released Wednesday before the markets opened for trading. Adding to investors' trepidation, the company signaled that advertising revenue will dip next quarter in comparison with the prior year. As we review the earnings of the national "paper of record," note that all comparative numbers refer to those of the prior-year quarter.

The New York Times' earnings: The raw numbers

Metric Q2 2019 Q2 2018 Year-Over-Year Growth
Revenue $436.3 million $414.6 million 5.2%
Net income  $25.2 million $23.6 million 6.8%
Diluted EPS $0.15 $0.14 7.1%

Data source: The New York Times.  

What happened with The New York Times this quarter?

Close-up of a cup of coffee and a newspaper on a wood cafe table overlooking a leafy street.

Image source: Getty Images.

  • Total subscription revenue rose 3.8% to $270.5 million. Digital-only subscription revenue increased by 14.1% to $112.6 million. The company added 197,000 new digital-only subscriptions, with 131,000 coming from news subscriptions and the rest from its cooking and crossword products. Total digital-only subscriptions increased by nearly 31% to 3.78 million subscriptions.
  • Advertising revenue inched up 1.3% to $120.8 million. A dip of 8% in print advertising revenue to $62.7 million was offset by a 13.7% leap in digital advertising revenue, to $58 million. However, this equation may not hold in the third and fourth quarters. Digital advertising sales will be up against tough prior-year comparisons in the back half of the year, and management warned investors today they're expected to decline in the high single digits next quarter.
  • "Other" revenue jumped nearly 30% to $40 million. Management attributed the improvement primarily to growth in the company's new television show, The Weekly, and to expansion in commercial printing operations.
  • The Times' operating margin fell by nearly 100 basis points to 8.7%. Higher costs cut into profitability: Compensation rose by 12.1% while raw materials and other production costs climbed by 7.5% and 10.2%, respectively. 
  • The newspaper cited climbing content costs for the inflation in operating expense. These included additional newsroom hires, and greater costs to produce The Weekly. The company also observed that it incurred higher labor and raw materials costs related to commercial print operations and advertising.
  • Because of these factors, total operating income declined to $37.9 million, against $40 million in the prior-year period. The Times was able to eke out a small increase in net earnings, however, thanks to slightly lower tax expense and a $3 million decrease in interest expense, which resulted from debt reduction undertaken in the prior year.

What management had to say

In The Times' earnings press release, CEO Mark Thompson discussed the factors that propelled top-line growth during the quarter, while touching on both the company's compressed margin and the outlook for advertising revenue: 

We had another strong quarter in digital subscription growth and we're making steady progress toward our goal of reaching 10 million total subscriptions by 2025. ...Today, The Times has 4.7 million total subscriptions. While profitability declined in the quarter, that is in large part a result of continued investment into growing our subscription business.

A big moment for us during the quarter was the successful launch of The Weekly, which premiered in June on FX and Hulu. The Weekly represents a significant opportunity to expose Times journalism to new audiences in a compelling format and we're very excited about its future potential. The Weekly was the largest driver of the 30 percent growth in other revenue in the quarter.

It was a good quarter for advertising with total advertising revenue growing slightly. Digital advertising grew by almost 14 percent with strong performances in direct sales, including from The Daily podcast and creative services. However, we expect the second half of 2019 to be somewhat more challenging for digital advertising than the first half, with this year's revenue [being compared to] our large gains in the third and fourth quarters of 2018.

Looking forward

For the third quarter, The New York Times advised investors to expect year-over-year total subscription revenue growth in the low to mid-single digits, and digital-only subscription revenue growth in the mid-teens. Paced by the aforementioned expected high single-digit decrease in digital advertising, total advertising revenue is anticipated to drop in the high single-digit range against the prior-year quarter. Management expects "other revenue" to improve by 25% to 30% next quarter.

As for the expense side of the ledger, the newspaper foresees amplified operating costs in the high single-digits next quarter from "continued investment in the drivers of digital subscription growth."

Investors can infer from these various expectations that the deceleration in top-line expansion, coupled with rising operating expense, means that net earnings will almost certainly decline next quarter against the third quarter of 2018.

While the organization still holds bright prospects as its digital content revenue improves, the near-term earnings headwinds catalyzed a bout of selling in NYT shares in the trading session following the earnings release. For long-term shareholders, it's important to realize that a portion of the newspaper's cost increases are discretionary. That is, growth investments are being undertaken today to sustain top-line momentum in future quarters.  

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