The New York Times Company — Q2 2018 Form 10-Q
Business context and reporting period
The Company is a global media organization with one reportable segment. It earns revenue principally from subscriptions and advertising, with other revenue from activities including commercial printing, building rentals, syndication, Wirecutter referrals, events and licensing. The quarter ended July 1, 2018 comprised 13 weeks; comparisons are with the quarter ended June 25, 2017. Six-month comparisons cover the 26 weeks ended on those dates. Interim results may be affected by seasonality and are not necessarily indicative of full-year results.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $414.6 million | $407.1 million | $828.5 million | $805.9 million |
| Operating profit | $40.0 million | $26.5 million | $74.1 million | $54.3 million |
| Net income attributable to NYT common stockholders | $23.6 million | $15.6 million | $45.5 million | $28.8 million |
| Diluted EPS | $0.14 | $0.09 | $0.27 | $0.17 |
| Adjusted operating profit (non-GAAP) | $59.4 million | $64.7 million | $114.8 million | $114.9 million |
| Adjusted diluted EPS (non-GAAP) | $0.17 | $0.17 | $0.34 | $0.27 |
Q2 GAAP operating margin was approximately 9.7%, compared with 6.5% a year earlier; net margin was approximately 5.7%, compared with 3.8%. For the six months, operating margin was approximately 8.9%, compared with 6.7%, and net margin was approximately 5.5%, compared with 3.6%. Adjusted operating profit and adjusted EPS are non-GAAP measures and should be read alongside GAAP results.
- Revenue mix: Q2 subscription revenue rose 4.2% to $260.6 million, advertising fell 9.9% to $119.2 million, and other revenue rose 40.0% to $34.7 million. For the six months, the respective changes were +5.9%, -6.6% and +21.9%.
- Digital subscriptions: Paid digital-only subscriptions reached approximately 2.892 million at quarter-end, up 24.0% year over year. Digital-only subscription revenue increased 19.6% in Q2 and 22.6% in the first six months.
- Advertising: Q2 print advertising declined 11.5% and digital advertising declined 7.5%. Management attributed digital weakness to a smaller audience and lower creative-services revenue; print weakness included declines in display and classified advertising.
- Costs and profitability: Q2 operating costs decreased 1.4% to $373.3 million, helped by lower severance costs, while adjusted operating costs increased 3.7% to $355.2 million, mainly because of higher marketing and commercial-printing costs. Management said these costs more than offset digital subscription and other-revenue growth in adjusted operating profit.
- Cash flow and investment: For the six months, operating cash flow was $77.7 million, versus $99.5 million; capital-expenditure cash payments were approximately $45.5 million, versus $21.4 million. Investing activities used $41.7 million, while financing activities provided $18.2 million, including about $40.5 million from stock-option exercises. Cash, cash equivalents and restricted cash at period-end totaled $254.6 million.
- Liquidity and debt: Cash, cash equivalents and short- and long-term marketable securities totaled $779.2 million at July 1. Debt and capital-lease obligations totaled $251.9 million, leaving those liquid resources $527.3 million above obligations. Current assets were $730.0 million and current liabilities $361.9 million. The Company reported a $382.0 million pension-benefit obligation.
Material changes, outlook and unusual items
- Q2 total revenue grew 1.8%, but the mix shifted: subscription and other revenue gains were offset in part by declining advertising and print subscription revenue. GAAP operating profit increased 51.1%, while adjusted operating profit declined 8.2% to $59.4 million. The difference reflects, among other items, substantially lower severance costs in 2018.
- Management expects higher marketing and commercial-printing costs to continue in Q3 2018. The filing provides no quantified revenue, earnings or full-year outlook. The Company said it expects to complete the headquarters redesign and consolidation by Q4 2018 and expects to continue comparable cash dividends, subject to Board review.
- The Company gave notice of its intent to exercise its option to repurchase the headquarters condominium interest for approximately $250 million in the second half of 2019. Management said it believes the exercise is in the Company’s best interest because it believes the property’s market value exceeds the option price.
- The Company reported $1.3 million of Q2 headquarters redesign costs and $2.2 million of severance costs. It recorded a $2.6 million pension curtailment in Q1 after freezing additional benefit accruals.
- Accounting changes included adoption of the revenue standard, which accelerated recognition on certain licensing contracts and increased opening retained earnings by $2.6 million; management estimated a $1.3 million decrease in 2018 other revenue from the standard. A separate $94.1 million reclassification of stranded tax effects from accumulated other comprehensive income to retained earnings affected equity presentation, not net income.
- A multiemployer pension withdrawal-liability dispute remains on appeal. The Company had recorded a $4.9 million liability; management said the total loss could reasonably exceed that amount by a range of zero to approximately $10 million. Other pending legal matters could adversely affect results or cash flows in an individual period, although management did not believe their ultimate resolution was likely to materially affect financial position.
- Letters of credit totaled $59.8 million, supported in part by approximately $68 million of marketable securities used as collateral. Management stated that available cash and operating cash generation, together with other sources, should meet financing needs for the next 12 months.
Important facts for investors to verify
- Whether paid digital subscription growth and digital subscription revenue can continue to offset declining advertising revenue, particularly given the reported smaller digital audience.
- Whether marketing and commercial-printing costs remain elevated in Q3 and how those costs affect adjusted operating profit and margins.
- The timing, funding and financial impact of the planned 2019 headquarters repurchase, including the option’s approximately $250 million price.
- The eventual outcome and payment exposure in the NMDU pension withdrawal-liability dispute, compared with the $4.9 million recorded liability and potential additional loss disclosed.
- Cash generation after capital expenditures, pension contributions and dividends; the filing reports six-month operating cash flow, not a standalone Q2 cash-flow figure.
- The impact of the Company’s non-GAAP adjustments and accounting changes when comparing periods; the filing recast 2017 measures for pension presentation and revised non-GAAP definitions.