Surging Digital Subscriptions Are Validating The New York Times' Business Model

By Asit Sharma Markets Fool.com

The New York Times Company (NYSE: NYT) reported credible first-quarter earnings on May 5, as digital revenue offset continued declines in the company's print media business. Excuse the pun, but after we review the "headline" numbers, we'll delve into the quarter's details, as well as the Times' subscription and revenue outlook.

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The New York Times earnings: The raw numbers

Metric Q1 2017 Q1 2016 Year-Over-Year Growth
Revenue $398.8 million $379.5 million 5.1%
Net income $13.1 million ($8.3) million N/A
Diluted earnings per share $0.08 ($0.05) N/A

Data source: The New York Times Company.

What happened with The New York Times this quarter?

  • Circulation revenue rose 11.2% to $242.4 million. A decline in print circulation was offset by an extremely vigorous expansion of digital subscribers, as well as an increase in The New York Times home delivery pricing.

  • The Times added 308,000 new digital-only subscriptions, setting a company record. The admirable haul exceeded the prior year increase by 62%. Total digital-only subscribers now exceed 2.2 million.

  • Crossword subscriptions surged 45% to 285,000. Revenue from crossword subscriptions made up 4% of total digital-only subscription revenue in the first quarter.

  • Advertising revenue dropped 6.9% to $130 million. Print advertising revenue fell by 17.9% to $80.4 million. This decline was partially offset by digital advertising revenue, which climbed a healthy 18.9% to $49.7 million.

  • "Other" revenue experienced a tangible increase of nearly 20% to $26.4 million. Management attributed the jump to new affiliate referral revenue from the purchase of two product recommendation web sites which the Times purchased in October 2016, The Wirecutter and The Sweethome.

  • Circulation, advertising, and other revenue all appear to be validating the Times' decisions over the past few years to pour resources into digital content and subscriptions. While print revenue remains a significant contributor to the company's bottom line, expansion into branded content, and mobile display advertising, are clearly proponents of future revenue growth.

  • Operating expenses creeped up due to higher marketing expenses and acquisition-related costs. Operating expenses totaled $367.4 million during the quarter, a roughly 4.4% increase over the prior year quarter.

  • The Times recorded interest expense of $5.3 million, quite lower than Q1 2016 interest expense of $8.8 million. In the last sequential quarter, the company utilized some of its annual operating cash flow, as well as the sale of marketable securities, to retire $189.2 million of 6.625% notes which were due in December 2016. Thus, the Times should record favorable year-over-year quarterly interest expense comparisons throughout 2017.

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Image source: Getty Images.

What management had to say

As in the last sequential quarter, a portion of the huge ramp-up in digital subscriptions is seen as an effect of the 2016 election and current news cycle, in which attention to the evolving Donald Trump presidency appears to correlate with higher interest in The New York Times content.

Given this event-driven boost, investors are naturally concerned with the retention of new subscribers. CEO Mark Thompson treated this topic in detail during the company's earnings call with analysts, stating the following:

We've seen an overall picture of an improvement in churn, which has been pretty consistent now for many quarters. Although it is too early to be certain that, that will continue with the very large number of new subscribers that we've had essentially around 1/4 of the whole that arrived in recent months.

I think it's fair to say the early indications about retention in the early months are very encouraging relative to the previous cohorts coming in. These are subscribers, the overwhelming majority who are on introductory offers. We moved to longer introductory offers some time ago. And that is a, we think, is a significant factor in improved churn numbers. Because it turns out the long introductory offers, where people get habituated to Times, come to value it, are better at retaining subscribers.

Looking forward

While the Times doesn't provide quarterly financial guidance, it does provide a rough overview of revenue outlook trends. In the second quarter of 2017, the organization sees total circulation revenues increasing at a "similar rate" to Q1 2017, while the rate of new digital-only subscriptions is expected to slow versus the last two sequential quarters.Total advertising revenues are expected to dip in the low- to mid-single digits against Q2 2016, which is roughly similar to the current quarter's decline. In sum, performance may not be quite as sterling as the first quarter, but the Times hopes to maintain its digital subscriber momentum through the rest of 2017.

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Asit Sharma has no position in any stocks mentioned. The Motley Fool recommends The New York Times. The Motley Fool has a disclosure policy.