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New
York Times Co (NYSE:NYT)
Q3 2020 Earnings Conference Call November 5, 2020 8:00 AM ET
Company Participants
Harlan Toplitzky - Vice President of Investor Relations
Meredith Kopit Levien - President and Chief Executive Officer
Roland Caputo - Executive Vice President and Chief Financial Officer
Conference Call Participants
Thomas Yeh - Morgan Stanley
John Belton - Evercore ISI
Alexia Quadrani - JPMorgan
Doug Arthur - Huber Research Partners
Vasily Karasyov - Cannonball Research
Craig Huber - Huber Research Partners
Kannan Venkateshwar - Barclays
Operator
Good morning, and welcome to The New York Times Company's Third Quarter 2020
Earnings Conference Call. All participants will be in listen-only mode.
[Operator Instructions]
Please note this event is being recorded. I would now like to turn the
conference over to Harlan Toplitzky, Vice President, Investor Relations.
Please go ahead.
Harlan Toplitzky
Thank you, and welcome to The New York Times Company's Third Quarter 2020
Earnings Conference Call. On the call today, we have Meredith Kopit Levien,
President and Chief Executive Officer; and Roland Caputo, Executive Vice
President and Chief Financial Officer.
Before we begin, I would like to remind you that management will make
forward-looking statements during the course of this call and our actual
results could differ materially. Some of the risks and uncertainties that
could impact our business are included in our 2019 10-K, as updated in
subsequent quarterly reports on Form 10-Q.
In
addition, our presentation will include non-GAAP financial measures and we
have provided reconciliations to the most comparable GAAP measures in our
earnings press release, which is available on our website at
investors.nytco.com.
With that, I will turn the call over to Meredith Kopit Levien.
Meredith Kopit Levien
Thank you, Harlan. And good morning, everyone. As I said when I was named
CEO in July, it's the honor of a lifetime to lead The New York Times Company
and to support the work of our extraordinary newsroom.
Let
me start by thanking our shareholders and the investor community for their
confidence as we continue to evolve from a legacy print newspaper business
into a growing subscription-first digital enterprise. I assumed my new role
in the same quarter that our digital-only subscription revenue overtook
print subscription revenue for the first time.
Digital subscriptions are now not just the company's fastest growing and
most important revenue stream, but also well on the way to becoming our
largest. That's a milestone many years in the making and a testament to the
enduring nature of our strategy.
Since this is the first conversation I am leading with you, I am going to
take a few minutes to reiterate our strategy and to share my view of our
long-term opportunity. I'll also try and put that all in the context of this
historic news moment.
Now
you've heard us talk for some time about an addressable market of 100
million curious people worldwide who are likely to pay for the type of
English language journalism The Times produces. We increasingly believe the
market is at least that large, there are nearly a billion people around the
world who read news digitally and more than 80 million who pay for news
today.
It's easy to assume that more will do so in the future as people get more
comfortable paying for digital subscriptions generally and as the supply of
advertising-first alternative continues to face pressure. So we're confident
that the market is there and also in our ability to penetrate a large
portion of it.
Our
model creates a virtuous cycle, a large newsroom made up of the world's best
journalists, a widely recognized and trusted brand and a differentiated
digital product enable us to attract and retain more subscribers. The larger
our subscriber base becomes, the more we can invest in our journalism and
standalone products and the more we can spread our fixed cost across a wider
base of users.
That means strong unit economics that improve as we scale with further
contributions from advertising, licensing and affiliate fees.
Now
given that we are in the midst of a historic and, thus far, inconclusive
election, I want to talk for a few minutes about our journalism and how its
differential value fuels our strategy. Let me first say how proud I am of
our newsroom and of the manner in which they are covering this election.
They've reported deeply on the candidates, chronicled the key issues facing
the country, illuminated the views and experiences of voters and they're
tracking the race itself.
If
you spent the last few days immersed in our App, You Are Not Alone,
yesterday, our coverage brought 120 million readers to The Times and more
than 75 million came the day before and they are coming not just to read,
but also to experience live coverage in text, multimedia, interactive
graphics and audio.
At
the same time that we have reporters covering the election on the ground
across the country, we've deployed a vast number of journalists to also
report on the still surging pandemic. That effort continues to yield one of
the most comprehensive datasets available to understand the virus' spread
and in particular, its exacerbation of underlying inequality.
And
while much of the world's attention remains focused on politics and the
pandemic, The Times has worked to keep other important issues in the public
consciousness, from hunger in America, which made up the entirety of a
recent issue of our Sunday Magazine to the ongoing conflict between Armenia
and Azerbaijan.
This journalistic range plays an important role in our business, which
brings me to one of the biggest questions I hear from many of you. What do
we believe happens to the business if or when the news cycle changes?
First, let me say, it's hard to imagine that we're entering a quieter period
for news anytime soon nor do we expect a change of pace in the fundamental
issues that demand understanding from technology reshaping our lives to
racial and wealth inequality, to the rise of China and the effects of
climate change.
People will continue to turn to The Times for understanding when things feel
less certain. We are also not reliant on any single story or topic to drive
our growth. In fact, the breadth of our core news report is both a
differentiator and a driver of our business. Our App this week offered both
the best real-time view of the election and the virus and also a guide for
how best to distract oneself from both.
Our
user data tells us that each additional topic that someone engages with
increases their likelihood of subscribing by 50% and while politics is an
important topic for our readers, around 80% go beyond politics to read other
subjects each week.
We've also begun to prove that The Times has a bigger role to play in
people's lives, games and cooking together have nearly 1.4 million
subscriptions and we'll continue to invest significantly in those products
and other efforts like Wirecutter and audio. And it's also worth noting that
over time, the model is becoming more resilient to big swings in the news
cycle.
We
saw that after the 2016 election, and we see it after other big news events,
net subscription additions go up significantly and after they crest, they
settle in at a higher point than before, in part, because with each passing
quarter and year, we get steadily better at executing.
With that said, a lot of hard work remains in order to make the product and
our underlying tech platforms match our ambitions and at least some of that
will require additional investment. This has been an extraordinary year so
far for net subscription additions.
We
ended the third quarter with approximately 6.9 million total subscriptions
and we crossed the 7 million mark already in the month of October, which
means we've added more than 2 million digital subscriptions in the last
year.
Although we have a lot of confidence in our ability to continue to grow,
2020 is an unprecedented year, and we don't expect to repeat its results.
That said, we are well on our way to surpassing the $10 million goal we had
initially targeted to hit by 2025.
Turning to advertising, our Digital results was down or slightly better than
we expected. As we've told you for the last year or so, we've been steadily
tilting the business back to the unique value of our media. Our first-party
audience data used in privacy-forward ways has enabled pockets of growth in
direct sold media and it's also now the foundation of a new thought
leadership platform called Pivotal, which our Ad team launched during the
quarter to help marketers consider their creative and brand strategies in
the context of broad consumer insights.
Audio advertising has also been an area of continued resilience, driven by
The Daily and in the third quarter, we entered into a multi-year augmented
reality collaboration with Facebook and we also advanced our work with
Verizon on 5G with the launch of our first 5G franchise from here.
As
we said in previous quarters, the advertising business continues to be
important to the company's economics, but we do not expect it to be a
significant driver of growth in the near-term.
Before I hand it off to Roland, I want to take a moment to thank my Times
colleagues, working across news and business. I've told you what makes us
confident in our strategy, but I'd be remiss if I didn't say that our
ability to execute that strategy lies in the talent, passion, and commitment
of the 4,600 plus Times people who've been working tirelessly in
unprecedented circumstances.
I
couldn't be prouder of how they've shown up for the mission for our business
and for one another in this intense year.
Over to you, Roland.
Roland Caputo
Thank you, Meredith, and good morning. As Meredith said, we remain pleased
with the progress we are making as we continue to execute against our
strategy and Q3 was yet another strong quarter for the company.
Adjusted diluted earnings per share was $0.22 in the quarter, $0.10 higher
than the prior year. We reported adjusted operating profit of approximately
$57 million, which is approximately $13 million higher than the same period
in 2019.
We
added 275,000 net new subscriptions to our core digital news products and
118,000 net new subscriptions to our standalone digital products for a total
of 393,000 net new digital-only subscriptions. Each of these figures
represents the highest third quarter net add numbers ever. Those net adds
brought us to over six million digital-only subscriptions at the end of the
quarter including 775,000 Games subscriptions and nearly 600,000 Cooking
subscriptions.
We
made two significant changes to our model from the prior two quarters. We
restored the paywall to the vast majority of the site, leaving only the most
critical coronavirus coverage outside of it and we returned to our normal
promotional cadence of $2 per week during non-sale periods and $1 per week
when on sale.
Total subscription revenues increased approximately 12.5% in the quarter
with digital-only subscription revenue growing 34% to $155 million, making
Q3 the first full quarter that digital-only subscription revenue exceeded
Print subscription revenue. The acceleration in the rate of sequential
quarterly digital subscription revenue growth from 30% in the second quarter
to 34% in the third quarter is largely a result of three factors.
First, the number of new subscriptions we added in the past year; second,
ongoing strength in retention of the dollar per week promotional
subscriptions who have graduated the higher prices; and finally, the
positive impact from our first-ever digital subscription price increase,
which began late in the first quarter.
Digital news subscription ARPU for the quarter declined approximately 11%,
compared with the prior year and approximately 3%, compared to the prior
quarter, largely consistent with the quarterly rates of decline we reported
for the last year.
The
newly acquired subscriptions, mostly on the dollar per week promotion
domestically and a deeper promotional rates in many areas outside of the
U.S. continued to more than offset the benefits from both subscriptions
graduating from the introductory promotion, as well as from price increases
on our more tenured full price subscriptions.
ARPU related solely to domestic new subscriptions declined close to 9%
versus the prior year and 3% versus the prior quarter. Our digital pricing
strategy is yielding strong results and we expect this to continue over
time. This strategy utilizes the dollar per week year-long introductory
price point to stimulate demand and increase conversion among more casual
readers whose willingness to pay is initially lower.
At
the conclusion of the promotional period, these subscribers moved to one of
two higher price points, either full price or in cases where data suggests
their willingness to pay remains lower, a midpoint increase before moving to
a full price at the end of the second year.
As
we said in the past, the dollar per week subscriptions continue to retain at
nearly the identical rates as our historical 50% off promotion now more than
25 months after introduction. Our digital pricing strategy also includes a
price increase for our most tenured subscriptions.
In
September, we resumed rolling out this price increase on our most engaged
and tenured subscribers who garner the most value from the product and whose
willingness to pay is highest. Churn on the initial 690,000 long-tenured
subscriptions who received the rate increase earlier this year has been
significantly lower than we expected and has generated more than $11 million
in incremental revenue for the company through the third quarter, almost all
of which falls directly to the bottom-line.
Given the price increase on our tenured digital subscriptions and the impact
from subscriptions graduating from discounted promotions, we should begin to
see a slight moderation in the rate of ARPU decline in the fourth quarter.
As
we look forward, we expect our digital pricing strategy to provide a
tailwind to ARPU throughout 2021 as approximately 1.6 million digital new
subscriptions graduate from $1 a week promotional discount. Additionally, we
expect approximately 650,000 newly tenured subscriptions will see a price
increase.
On
the print subscription side, revenues were down nearly 4%, largely due to a
decline in single copy and international bulk sales. Revenue from domestic
home delivery print subscriptions grew 2.5% in the quarter as a home
delivery price increase implemented early in the year more than offset
year-over-year subscription declines.
Total daily circulation declined 16% in the quarter, compared with the prior
year, while Sunday circulation declined 6.2%. The widespread business
closures, increased remote working and reductions in travel as a result of
the pandemic contributed approximately seven percentage points to The Daily
copy decline and two percentage points to Sunday.
Total advertising revenues declined approximately 30% in the quarter as both
digital and print were severely impacted by lower marketer demand during the
pandemic. Digital advertising declined approximately 13% in the quarter,
compared with the prior year. This result is somewhat better than the
guidance we gave on our second quarter earnings call, largely as a result of
higher levels of spending from our large deals with Verizon, Facebook, and
Mastercard.
Print advertising declined approximately 47% with luxury, entertainment,
media and home furnishing categories hit hardest. Other revenues declined
approximately 2%, compared with the prior year to $47 million, primarily as
a result of fewer television episodes, as well as lower revenues from
commercial printing and live events.
These declines were partially offset by licensing revenue related to
Facebook News and an increase in affiliate referral revenue from Wirecutter.
Adjusted operating costs decreased nearly 4% in the quarter.
Cost of revenue also decreased approximately 4%, as lower print production
and distribution costs and advertiser servicing costs more than offset
higher digital content delivery and journalism costs. Sales and marketing
costs decreased approximately 21%, largely driven by lower media spend and
advertising sales costs.
Please note that we do not view third quarter marketing expense as
representative of future spend given the special circumstances under which
we were operating in the quarter. In fact, we've already begun restoring
marketing spend to more normalized levels as we entered the fourth quarter.
Product development cost increased by approximately 28%, largely due to
growth in the number of engineers employed.
We
plan to continue adding to headcount in this area over the next 12 to 18
months as we expect to continue to lean into our investments here and in our
journalism to drive further growth. Our effective tax rate for the third
quarter was 17.8%, which included tax benefit from stock price appreciation
on stock-based awards that settled in the quarter.
On
a going-forward basis, we continue to expect our tax rate to be
approximately 26% on every dollar of marginal income we record with
significant variability around the quarterly effective rate.
Moving to the balance sheet, our cash and marketable securities balance
ended the quarter at $800 million, an increase of $43 million, compared with
the second quarter. Company remains debt-free with a $250 million revolving
line of credit available.
Consistently conservative approach we have taken in managing our balance
sheet in tandem with the continued strong results produced by our
subscription-first business provides the financial flexibility and
confidence to continue pursuing our growth strategy even as we manage
through the economic fallout of the COVID-19 crisis.
Subsequent to the quarter close, as part of our continued effort to reduce
the size and volatility of our pension obligations, we entered into a
transaction with an insurance company to transfer a portion of our future
benefit obligations and annuity administration allowing us to reduce our
overall qualified pension plan obligations by $235 million.
With this transaction, which was funded from planned assets, we expect to
record a non-cash pension settlement charge of approximately $80 million to
$85 million in the fourth quarter.
Let
me conclude with our outlook for the fourth quarter of 2020, which is based
on our current knowledge and assumptions and could be impacted by the
evolving effects of the pandemic. Total subscription revenues are expected
to increase approximately 14%, compared with the fourth quarter of 2019 with
digital-only subscription revenue expected to increase approximately 35%.
Overall advertising revenues are expected to decrease approximately 30%,
compared with the fourth quarter of 2019, and digital advertising revenues
are expected to decrease in the mid-teens. Other revenues are expected to
decrease approximately 15%, as a result of fewer television episodes and
lower revenues from live events.
Both operating costs and adjusted operating costs are expected to be flat or
decline in the low-single-digits compared with the fourth quarter of 2019,
as we carefully manage non-essential spending, while continuing to invest in
the drivers of digital subscription growth.
And
with that, we'll be happy to open it up for questions.
Question-And-Answer Session
Operator
[Operator Instructions] The first question today comes from Thomas Yeh of
Morgan Stanley. Please go ahead.
Thomas Yeh
Hi.
Thanks and good morning. Meredith, you talked about in your prepared remarks
the greater resilience of your subscriber base to slower news cycles and
obviously, the news cycle is out of your control. What do you think are the
key drivers heading into 2021 either in terms of more content or top of
funnel or registered user conversion that could deliver the next leg of
subscriber growth going forward?
Meredith Kopit Levien
Yes. Thanks. Good morning, Thomas and thanks for a good question. I'll say a
couple things about that. The first one, something we've said before is,
with every passing month and quarter, we are adding more registered users.
So, the pool of people who we can then essentially engage and get to
subscribe is growing.
So,
I'd say, that's a really big driver and you should assume that the strong
news cycle that we've essentially experienced all year means we're adding a
lot of registered users and once they register, they're a lot more
addressable to us. We have more opportunities to engage them directly and
get them to the point of conversion.
I'll say a couple more words about some of the things I said in my prepared
remarks. We know that subscribers who experienced The Times' breadth are
much more likely to pay and stay. And so, we've got plenty of work under way
to get people exposed to more breadth and we think that plays a really big
role in the model. And then, I'll say we've gotten much better at and with
still sort of room ahead of us, at getting people to hit the regi well and
hit the payroll.
So,
we used to have sort of blunt instrument meter applied in the same way
everywhere and now we run the meter in a much more customized way where we
are able to account for the way someone comes to the site and based on those
signals, based on signals of how they engage at the outset, we can do a
better job of customizing when do we actually ask them to pay.
Some people may need coming from one channel or another you may need to
see more stories than someone else. So all of those things give us real
confidence in the model going forward.
Thomas Yeh
Thanks. That's helpful. And then, maybe another one for me. As your
subscriber growth base has grown over the past year, could you talk a little
bit about how the demographic audience has evolved on the core news product
in the U.S.? And there have been some reports about competitor efforts to
kind of broaden out their younger to get to an younger audience and would
love to hear some color on what success you've been able to achieve on that
front?
Meredith Kopit Levien
Yes. I would say, all year long, we've been saying a version of the same
thing, which probably goes back to high news periods over the last several
years. The audience tends to be younger that we're bringing in than prior
cohorts of starts.
In
this particular quarter, we had a higher number of people under 40. So, as
we add a lot of net adds in a quarter and as we see these spikes in the
news, we are just reaching to the outer edges of our propensity cycle and
we've got a number of reasons for that.
The
Daily has become a very significant way that people engage with The Times.
And The Daily's audience, I think, has a vast majority under certainly
under 50 and many, many, many people under 40. So that tends to bring in a
younger audience of people who now have an affinity for The New York Times.
So
I'd say news is probably the biggest change we're seeing in the past
quarter, given the significance of the domestic story is obviously, the
election, also the effects of the pandemic domestically. We also had a
disproportionate number of starts coming from the United States versus
internationally.
Thomas Yeh
Great. Thank you so much.
Operator
The
next question is from John Belton of Evercore ISI. Please go ahead.
John Belton
Hi.
Thank you. I'll stay on the topic of subscribers. So, I think, Meredith, you
said in your remarks that historically, the pattern you've seen is after big
periods of subscriber growth you've been able to settle at higher rates of
net additions in the future. Is this so, if I take that comment, do you
think, news cycle aside, could you add more subscribers in, say, 2021 than
you added in 2019? And then, I have a follow-up.
Meredith Kopit Levien
So,
I also said in my prepared remarks that, I think, in many ways 2020 is an
outlier year. So, I don't think you should expect us to get to the same
place where we're getting in 2020 given the extraordinary nature of the news
cycle. That said, we are very optimistic that we can continue to grow the
model in subs.
And
I'll go back to the answer that I gave Thomas a minute ago, which is, with
every passing day, week, month, we are adding many, many more registered
users and those registered users are a new pool from which we can drive
subscription, and registered users convert at a substantially higher rate
than anonymous users.
So,
that's a big part of why our expectation is, even if and as the new cycle
changes, and audience comes down to some degree, you've got a pool of people
right there who are easier to convert than anonymous users. So, I think you
should expect to see real growth. But I think this particular news cycle is
an extraordinary one and I don't think it will repeat exactly as it did this
year.
John Belton
And
I guess, the follow-up would be, what about this new cycle? What about the
subscribers you've added over the last several months makes it different? Is
there anything in terms of engagement or churn characteristics that you are
seeing on those recent cohorts that's different than before?
Meredith Kopit Levien
Yes. Those are both good questions. Let me actually address churn in that,
because I think that, as the base gets larger, that's even more important.
Roland and I have both said over the last few years that churn has been a
great story and one we probably haven't said enough.
Even as we are scaling the base of subscribers, we've been able to hold
churn within a sort of limited range, but we've been able to keep churn
stable, which I think is a very big achievement and we're able to do that
because with every passing quarter, we get better at two things, the sort of
mechanical aspects of churn, how do you keep people through the step-up
moment, how do you actually deal with the - like very straightforward
commercial parts of it.
But
far more importantly, we're just able to engage them better, right? So we're
getting people to use the product, getting people to form a daily habit with
the product. We get better and better at that as we go. And then, it's worth
saying because I think this is also in your question, it's worth saying that
the cohorts of people who come in around, particularly big news events, tend
to retain even better, at least as well, if not even better.
So,
for example, we've tracked really closely the original surge cohort around
the 2016 election in early 2017. That was an extraordinarily high retaining
cohort and we are now, what, 7.5 months into the global pandemic driving the
news cycle and that cohort is also retaining at a really high level. So,
we're optimistic that you come in on the peak news event and that has a
relationship to the affinity you then have for the brand, and we are also
optimistic about our technical ability to get better and better at engaging
people.
John Belton
Got
you. That's helpful. Thanks. I also want to just mention, I loved following
the upshot needle the other night. That was quite a good tool.
Meredith Kopit Levien
Great. Happy to hear you say that and props to Nate Cohen and the whole team
who have really worked tirelessly on all of that. Thank you.
John Belton
Thanks.
Operator
The
next question comes from Alexia Quadrani of JPMorgan. Please go ahead.
Alexia Quadrani
Thank you, so much. I just wanted to follow-up, I think, on a comment you
made in your opening remarks about pulling back a bit on the $1 a week,
meaning having more of a mix of the $1 a week or the $2 a week. One, did I
hear that correct? And then, if so, what is your thought process behind
maybe becoming a little less promotional, if that's what I am reading into
during this period? And then I have a follow-up.
Meredith Kopit Levien
Yes. Good morning, Alexia. On $1 a week, I think Roland mentioned that, in
the quarter, we did go back to our $1 a week only on sale periods. What I'll
say is, that's an instrument that's really working for us and particularly
the promotional pricing and particularly in very big news moments. We think
it helps us reach to the outer edges of our propensity circle and I got
asked the question earlier about how the demo has changed.
We
are reaching more and more younger people, and I think that promotional
price plays a role in it. It's also worth saying, and Roland said this in
his prepared remarks, we are getting more confident with each passing
quarter about our ability to step people up effectively and so, as we do
that, our algorithms are getting better on how to step up.
Our
mechanics of when we ask, and how we sort of monitor engagement and when we
do and when we make the App, all of that is improving. So what I would say
is, we're going to continue to use the promotional price where we see an
opportunity to really scale the base in a moment of intensity in the news
cycle or otherwise. And we are confident that we can step those folks up as
we go.
Roland Caputo
Hey, Alexia, I just want to maybe add a little bit of detail here. So, what
you may recall is that, in Q2, we had open access, because of the
coronavirus. And when we did that, we also as a little bit of a counter to
that, we remained on sale all days of the quarter, that is very atypical for
us. We typically have a cadence where we're on sale at certain points and
we're not on sale at other points.
And
what my point is, is that, we've gone back to our normal cadence. So Q2 was
an outlier in terms of having it always on. Prior to Q2, we did not and
we've just gone back to our normal cadence.
Alexia Quadrani
Okay. That's very helpful. And then, just my second question is on the
margin expansion. I know further out 2021 or when do we start seeing it
really hit? I am curious if you can elaborate really on the thought of how
you see that being driven. Is it really largely a reduction in this
tightened investment spending you guys have been in the middle of for a few
years? Or do we expect to see some natural sort of leverage in the business
that I know you guys have talked about for a while.
Meredith Kopit Levien
Yes. I'll take that, and Roland can add as he sees fit. I would say, within
our core news product, we're reaching a scale where we're starting to see
operating leverage and improvement. I will caution you that we still have a
print product in decline and I'll say we don't rule out investing into this
very significant opportunity in front of us for the kind of
once-in-a-generation opportunity.
And
we have a lot of ambition around what we want to accomplish. So, we don't
rule out further investment. But we are reaching a scale in the core news
product where we're starting to see it improve.
Alexia Quadrani
Thank you.
Operator
The
next question is from Doug Arthur of Huber Research Partners. Please go
ahead.
Doug Arthur
Yes. Thanks. Just wanted to sort of explore the sequential change in digital
news adds. I mean, typically, the third quarter is a seasonal uptick for
you. You get back to college contracts kicking in. I think there is probably
people going away for the summer in adding digital subs while they're away.
So, I mean, obviously, you front ran a lot of strength in Q1 and Q2. Was
there anything unusual about this third quarter that kind of caused a
drop-off in ads this quarter?
Meredith Kopit Levien
Hi,
there. I think the unusual thing to consider the outlier is really Q1 and
Q2. And I would say, Q3 represents a step function increase over last year
and every other Q3. And if you annualize the number from this past quarter,
that's a pretty decent number and that reflects the kind of step function
improvement in the business that I highlighted in my prepared remarks and in
an answer to some of these questions.
And
I'll just like the sort of coronavirus story at its peak, which was mostly
in the end of the first quarter and then throughout the second quarter. I
would consider that an outlier even to a news cycle that we think will
continue to be strong.
Doug Arthur
And
on the digital advertising, you were guiding down 20%, you came down you
were down 12.6% or so, so better. Are you seeing and obviously, you cited
some big projects you did - are you seeing a little bit of light at the end
of the tunnel there in terms of going into 2021?
Meredith Kopit Levien
I'll say that there I touched each of these briefly in my prepared remarks
that there is three things that are working well in advertising and proving
to be quite resilient. One is the first-party data strategy. So essentially,
selling our high margin media with superior ability for marketers to target
audiences in privacy-forward ways using our first-party data.
There seems to be real demand for that. That is an area that we'll continue
to focus on. And I think, over time, will be a really important driver of
the ad business and gave us some resilience within certain categories and
sort of pockets in the third quarter. We're still doing big partnerships. So
I talked about two that one new one with Facebook that launched in the
quarter and then an expansion of the Verizon partnership.
So
that will continue to be a driver. And then, I mentioned audio, and what I
would say on audio is that's a place where we think there is going to be
real demand at high CPM for some time to come, and our product set is
expanding and it's expanding because The Daily keeps expanding, the audience
keeps growing, and it's a media product as the audience grows, there is more
high CPM advertising to sell.
And
obviously, we acquired Serial Productions and have a multiyear partnership
now into with the rights to This American Life. And that's obviously
coming online next year. And then a number of other shows launching. So, I
think audio will be something to watch in our ad business for some time to
come.
Doug Arthur
Great. Thank you.
Meredith Kopit Levien
You
are welcome.
Operator
The
next question comes from Vasily Karasyov of Cannonball Research. Please go
ahead.
Vasily Karasyov
Thank you. Meredith, I wanted to go back to a question that you were
answering a little bit a little earlier today about the level of net adds.
Do you think 2019 level of net adds is sustainable or reachable for you? So
that's number one. And number two, I think you touched on it, but I wonder
if you could talk a little more details. Do you think the fact that the
schools are not open is a big headwind in Q3 for net adds?
Meredith Kopit Levien
So,
on the first question, let me I think you're essentially my the shortest
answer I can give you, we don't give forward-looking guidance. But the -
I've already suggested that when there is a peak moment in net adds, we
settle in at a higher place than where we come off, but we settle in at a
higher place than before.
And
Ive shared in my prepared remarks, all the reasons we continue to feel
optimistic that we can grow net adds if you essentially assume 2020 has been
an outlier. And on your second question, I think you are asking say that
one more time, just did schools closing...
Vasily Karasyov
Yes. The fact that it's an unusual quarter in terms of going back to
schools, colleges, all that kind of stuff. Do you think that was a headwind
for net adds in Q3 for you?
Meredith Kopit Levien
I
don't think so. I don't think so. And again, I gave this answer before, but
Q3 annualized, we'd be very happy with that result and it's a step function
increase over every other Q3 that we've had.
Vasily Karasyov
All
right. Thank you very much. Have a good day.
Meredith Kopit Levien
You, too.
Operator
The
next question is from Craig Huber of Huber Research Partners. Please go
ahead.
Craig Huber
Yes. Thank you. Meredith, maybe you could first just talk a little bit
further about the size of the newsroom, if you could size that for me,
please. I assume it hasn't changed much this year, but maybe just talk a
little bit about further. Are you planning on investing, meaning add
headcount in a fairly material way next year? What's the game plan there,
please?
Meredith Kopit Levien
So
I would say and Roland and I have said this for some time, we are going to
continue to invest in the newsroom. That is central, the differential value
of the journalism is central to the strategy. So we will continue to invest
there. We've also said in the past that, that investment so we still grow
the newsroom, but that investment does not have to scale with the
opportunity.
So,
we can add journalists and add subscribers at a higher rate, right? The
other thing I would say is, the nothing drives a model more than the
things that I cited in my prepared remarks, which are the range of our
journalism, the breadth of the report and the differential value we're able
to produce with it. So you should assume we'll keep investing. But again,
not at the same scale that we expect to get results from the model.
Craig Huber
And
then also, can you size for us you kept talking about in a good way the
number of registered users are very happy with that number. But what how
many millions is that right now, the registered users?
Meredith Kopit Levien
We
have not and are not prepared to share that number publicly. What I can tell
you is, were adding millions of registered users every quarter and
registered users convert at a higher rate, substantially higher rate, than
anonymous users. And what's remarkable about it, it shouldn't be remarkable,
but it's been satisfying to see that that's not just an in the moment
opportunity. Two, three, five months after they register, they are still
more likely to convert than an anonymous user.
Craig Huber
And
then my final question, maybe if you could just touch on your podcast
product, The Daily. Maybe size that for us number of users, and what sort of
the game plan going forward. And also, how helpful is that product to
helping to drive folks to sign up for your news-only product?
Meredith Kopit Levien
Yes. Great, great question. I would say, The Daily is very helpful to a
number of things. It's helpful to driving affinity to the brand. We it's
harder to track directly how it drops people into the core news subscription
funnel.
But
we have every reason to believe it does, given how our results have improved
with in the four years now that we've had The Daily. We also know that the
ads that we run on The Daily are our own journalists talking about the work
that they do, are quite performative. So, even just The Daily, the program
drives affinity. The ads within it drives do drop people in the as best
as we can tell do drop people into the funnel.
And
then I would say, it remains, and I said this in my prepared remarks, a very
strong ad business, and we think it will continue to be a growing ad
business. I think you asked me about where audience is. I may get a
correction on this from Roland, but I think we're close to 4 million users a
day.
So
huge audience and the thing that's remarkable to me about The Daily's
audience is that's like almost twice as large as the paper was at its peak
and it's only four years old and it's got an audience with the vast
majority, much younger than, say, the traditional audience of the newspaper,
The New York Times.
So,
I'll say one more thing, which is The Daily has also proved to be a
distribution mechanism for other audio products from The Times. We are
really excited about that. So we can the speed of The Daily as a way to
launch new things into the world, and we think that's going to have real
value, both to the ad business and the subs business over time.
Roland Caputo
Just one maybe add even a little more context to that four million daily
downloads number. That's more than two times what it was a year ago. So the
growth is still exploding there as far as audience is concerned.
Meredith Kopit Levien
That's right. It's also a highly, highly engaged audience. I think most
people listen four or five times a week which is amazing.
Roland Caputo
Great. Thank you both.
Meredith Kopit Levien
Thank you.
Operator
The
next question comes from Kannan Venkateshwar of Barclays. Please go ahead.
Kannan Venkateshwar
Thank you. So, Roland, on the ARPU front, when we look at next year, you
mentioned in your prepared remarks that there are 1.6 million subs who are
rolling off of promos and this year, you've had a much higher proportion of
gross additions because of the news cycle and so on and so forth. So as you
head into next year, from an ARPU perspective, that would suggest a
significant pickup or a significant change in trajectory for ARPUs.
So,
I just want to make sure I read that correctly and if that assumption is
correct that versus the double-digit decline you've seen this year, you
probably should be heading using that 1.6 million number somewhere in the
mid-single-digit decline range for next year.
And
secondly, on the cost front, one of the big tailwinds this year has been the
reduced marketing spend and I think Meredith mentioned this in her prepared
remarks that it's going to normalize when the environment normalizes. What's
the normal level of marketing spend? Maybe if you could help us understand
that as a proportion of revenues? Or maybe some other normalization metrics?
Thanks.
Roland Caputo
So
Kannan, on the ARPU question, directionally, you're correct. So, as I
described our pricing strategy, if you couple that with the large number of
new additions we've had over the last year, you get you understand that
those folks will be transitioned to higher prices next year, I cited 1.6
million. So that's an awful lot of folks who will be stepping up in price.
And we'll also have some folks who hit the they pass through the tenured
gate and we'll get their $2 increase.
So,
when you combine those two things, we think that certainly ARPU decline will
slow down and potentially could start will stabilize and could potentially
start to head north. And again, that will be somewhat contingent on how many
new subs we bring in next year. But we feel like, definitely have a good
tailwind from our pricing strategy, from our step-up strategy. And that's
going to firm things up on the ARPU front next year.
As
far as your cost question, I don't have an exact number or metric I can give
you on the marketing spend. I can say that we've already started to restore
that. I would say if you wanted to in general, we think we would invest in
marketing as in our other two areas, but at a much more modest rate than we
will in product, and we will in journalism and what you're seeing in product
in journalism.
But
certainly get to levels that we've spent in the recent past, over the last
two quarters, basically, you should ignore as far as indicating our level of
spend in the future. We still believe there is good money to be spent, both
in brand and direct marketing and you'll see us doing just that.
Kannan Venkateshwar
Got
it. I guess, if I could just follow-up on that with a margin question, which
is, you have a better ARPU trajectory, but costs potentially step up next
year, compared to this year. So when we look at EBITDA margins going into
next year, I mean, should they be significantly better, worse, or roughly
comparable? I mean, obviously, you don't give forward guidance. But
directionally, if you could help us think about where margins could be
headed for next year? That would be useful.
Roland Caputo
Right. So, we don't guide that far advance and we don't guide on that
metric. But what I can say is, the core part of the business, the core
digital subscription business, we're seeing good leverage there. So we'll
put some more money in there. But we'll get more money out of that than
we're putting in.
But
I think Meredith mentioned before, the Print business aside, I mean, we
still reserve the right to make discrete investment where we see the ability
to further accelerate our growth, and that may not come in the core of the
business and they come in the form of our standalone businesses. So, I don't
want to give a specific number there.
But
again, as the business matures, as the scale improves, we're seeing better
and better leverage from the core of the business and it's really going to
really turn on how much opportunity we see elsewhere and what level of
spending is there. But core of the business, big part of the business, we're
going to see the margin expansion there.
Kannan Venkateshwar
Good. Sorry, one last question, if I could. On the balance sheet front, you
are sitting on a huge amount of cash. And given the growth this year and the
improvement in ARPUs next year and so on, you seem to be getting to a cycle
where you have a lot more visibility into your underlying trend lines. So,
Meredith, in your seat now as CEO, and Roland, from your perspective, as
well, does this make you think more expansively about how to deploy that
capital either towards capital returns or maybe something else from your
perspective?
Meredith Kopit Levien
Yes. I mean I'll give you a broad answer, which is to say, we see a really
big opportunity. We're thinking very hard about the best way to seize that
opportunity and we're not afraid to use the balance sheet to invest where we
think that's going to make sense for the long-term value of the company. And
you saw us do that with serial productions and autumn in the last quarter.
And
I would say, Roland and I have talked for some time about continued
investment in journalism, continued investment in our digital product and
underlying tech. And then, in marketing, to the extent that and we both
just mentioned, we're thinking very hard about the opportunity with our
standalone products. So to the extent that it makes sense to the balance
sheet to seize that opportunity faster or more effectively or in a way
that's going to be more accretive to the business, we'll do it.
Kannan Venkateshwar
Got
it. Thank you so much.
Operator
This concludes our question and answer session. I would like to turn the
conference back over to Harlan Toplitzky for any closing remarks.
Harlan Toplitzky
Thank you for joining us this morning. We look forward to talking to you
again next quarter.
Operator
The
conference is now concluded. Thank you for attending todays presentation.
You may now disconnect. |
