Ellington Financial Q4 2023 Earnings Call Transcript

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February 7, 2024

There are 8 speakers on the call.

Operator

Good morning, everyone, and welcome to The New York Times Company's 4th Quarter and Full Year 2023 Earnings Conference Call. Also note, today's event is being recorded. And at this time, I'd like to turn the floor over to Anthony DiClemente, Senior Vice President of Investor Relations. Please go ahead.

Speaker 1

Thank you, and welcome to The New York Times Company's 4th Quarter and Full Year 2023 Earnings Conference Call. On the call today, we have Meredith Kopit Levien, President and Chief Executive Officer and Will Bardeen, 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. These statements are based on current expectations and assumptions, which may change over time. Our actual results could differ materially due to a number of risks and uncertainties are described in the company's 2022 10 ks and subsequent SEC filings.

Speaker 1

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 and is available on our website at investors. Nytco.com. In addition to our earnings press release, we have also posted a slide presentation relating to our results also on our website at investors. Nytco.com. And finally, please note that a copy of the prepared remarks from this morning's call will be posted to our investor website shortly after we conclude.

Speaker 1

With that, I will turn the call over to Meredith.

Speaker 2

Thanks, Anthony, and good morning, everyone. 2023 was a strong year for The Times that showcased the power of our strategy to be the essential subscription for every curious person seeking to understand and engage with the world. Our news report proved indispensable to 70 people, providing original journalism across the full range of human experience. Our lifestyle products serve scaled audiences for games, sports, cooking and shopping recommendations. By putting them all together and giving millions of people multiple reasons to turn to the times every day, We delivered business growth and demonstrated our ability to penetrate a large market.

Speaker 2

We drove this performance amidst a tough year for the news industry in which we and others faced persistent headwinds. We continued to see lower levels of Casual news audiences due in part to the ongoing shift from the largest tech platforms and our ad business grapples with heightened market volatility impacting publishers. Our strategy is designed to both counterbalance These headwinds and position us to be a category leading global media subscription business. Let me share the highlights from the year. We added 880,000 net new digital subscribers, bringing our total to nearly $10,400,000 and progressing us on the path to our next milestone of $15,000,000 The bundle accounted for a majority of our subscriber starts in the year.

Speaker 2

Bundle and multi product subscribers made up 41% of our subscriber base at year end and those subscribers continue to be more engaged, better retaining and willing to pay more over time than single product subscribers. New York Times subscriber engagement as measured by the share of subscribers on our products each week reached its highest point in nearly 3 years by year end and the time now sees more digital engagement than any other American news source by total monthly time spent. We crossed $1,000,000,000 in annual digital subscription revenue for the first time in 2023 and consolidated ARPU strategy, which is made possible by the growing value we provide to consumers through our differentiated multi product offering. It was a challenging year in the ad market for publishers, but the core of our ad business, Premium proprietary ad canvases enhanced with first party data proved resilient and continued growing And we saw real momentum as we extended our ad products across the portfolio, particularly to the athletic and games where we see a lot of running rooms. It was also a record year for affiliate and licensing revenue.

Speaker 2

Wirecutter outperformed expectations in every quarter and in December we announced a new Multi year licensing agreement with Apple News Plus for the athletic and wire cutters. Deals like this underscore or that our intellectual property has unique value recognized by some of the world's largest tech platforms. We exerted cost discipline throughout the year and substantially slowed overall expense growth, while redirecting resources and continuing to invest in our areas of competitive advantage. All of this progress across the business drove strong earnings per share, adjusted operating profits and free cash flow growth. In fact, in 2023, each hit their highest point since our transformation into a digital first, subscription first business began more than a decade ago.

Speaker 2

Inclusive of the athletic, We also expanded margin by 100 basis points. We delivered that improved profitability even as our print business continue to experience secular decline. Our results also reflect the cash generative nature of our model and give us the confidence to announce the 6th consecutive annual increase to our dividend. This financial growth also positions us to continue investing in expert independent journalism, which is central to how we expect to create value over the long term. I'll turn now to our 4th quarter results.

Speaker 2

In Q4, we met or beat quarterly guidance on digital and total subscription revenue, other revenue and adjusted operating costs. Digital advertising came in slightly below the low end of our guidance and total advertising came in below our guidance. We added 300 subscribers in the quarter, we attribute the strong performance to multiple distinct drivers. Those drivers include continued healthy demand for games, peak season for cooking, a more ambitious subscription gifting program propelled by our large base of existing subscribers and a robust deal period for B2B This is all in addition to high existing subscriber engagement across a range of news topics. We also benefited from further improvements in how we use machine learning to maximize audience, engagement and conversion.

Speaker 2

Consistent with our strategy, we grew audience for the athletic, Cooking, Games and Wirecutter in Q4. Audience growth on The Athletic which recently passed its 2 year anniversary with The Times was particularly strong. This was thanks to our ongoing efforts to enhance coverage, improve our technical infrastructure and make more stories available for sampling. We see a huge opportunity in sports and are making palpable progress on our ambition for The Athletic to become a top destination for sports news globally. Games benefited from consistency in the number of people who play Wordle every week and also from our hit homegrown puzzle Connections, which now has over 15,000,000 weekly players.

Speaker 2

Total ad revenue in the quarter came in below our expectations due primarily to a larger than anticipated print revenue decline, our digital performance including was impacted by marketers avoiding some hard news topics like the Middle East conflict. We are nonetheless confident in the long term potential of our digital advertising business and our core display offering was resilient as we extended our proprietary ad canvases and first party data to more of our portfolio. Revenue beyond subscriptions and advertising grew 10% in the quarter, driven by a record setting holiday season for Wirecutter and Strength in licensing. Let me close with a few thoughts about what's ahead. At its core, our strategy is designed to make The Times an essential daily habit for many millions more people.

Speaker 2

Our top priority now is to continue making our journalism and lifestyle products So valuable at scale that people seek us out directly and build enduring daily habits. However, the information ecosystem evolves. While we expect many of last year's industry headwinds to persist, We believe our multi product portfolio and multi revenue stream model combined with ongoing cost discipline position us well to be a scaled market leader. Now let me turn it over to Will for more details on our results And I'll return after that with a few closing thoughts and to take your questions.

Speaker 3

Thanks, Meredith, and good morning, everyone. In 2023, the successful execution of our essential subscription strategy drove strong financial results despite a challenging and dynamic environment. Our portfolio of market leading news and lifestyle products was designed to grow our subscriber base, increase subscriber engagement and lifetime value and strengthen our multiple revenue streams. As our subscriber base has scaled, we've moderated our overall expense growth, while continuing to prioritize strategic investments that help position us For long term value creation, our full year 2023 financial results demonstrate that our strategy is delivering as designed. We saw increases in revenue, AOP, EPS and free cash flow growth and free cash flow and we finished the year in an even stronger market position.

Speaker 3

Overall revenue for the year increased 5% as growth in digital subscription, affiliate and licensing revenues more than offset ongoing declines in print. Combined with moderating cost growth, this resulted in AOP growth of 12% year over year and expanded our AOP margin by approximately 100 basis points to over 16%. The cash generative nature of our business model is also evident. For the full year 2023, we generated approximately $338,000,000 of free cash flow, up from $114,000,000 in the prior year. In addition to being driven by AOP growth, free cash flow benefited from lower cash taxes, lower CapEx and lower working capital outflows compared to 20 22.

Speaker 3

$114,000,000 to shareholders in 2023 through a combination of $69,000,000 in dividends and $45,000,000 in stock repurchases. Over the last 2 years, we've returned nearly 61% of our free cash flow to shareholders. As Meredith mentioned, we also announced a dividend increase of $0.02 to $0.13 per share, reflecting our confidence in the durability of our strategy. Now I'll discuss the 4th quarter's key results, followed by our financial outlook for the Q1 of 2024. Please note that all comparisons are to the prior year period unless otherwise specified.

Speaker 3

As a reminder, Due to a change in the company's fiscal calendar in 2022, there were 5 fewer days in the Q4 of 2023 compared to the Q4 of 2022. Page 23 of the earnings release published this morning includes a reconciliation of revenues excluding the estimated impact of the 5 fewer days in 2023. My comments on both revenues and costs today will be on a reported basis, which includes the impact of the 5 fewer days. I'll start with a discussion of our subscription business. We added approximately 300,000 net new digital subscribers in the quarter.

Speaker 3

As Meredith described, bundle and multi product additions led the way and made up 41% of our total base at year end, well along the path to exceeding 50% in the coming years. Total digital only ARPU grew year over year for the 3rd consecutive quarter to $9.24 an increase of approximately 3%. In Q4, we had the largest number to date of bundled subscribers transitioning to higher prices and benefited from the impact of our digital price increase on tenured single product subscribers. While it is still relatively early, we continue to be encouraged that bundle subscribers are retaining and monetizing better than news only subscribers through these step ups. As a result of both higher digital subscribers and digital only ARPU in the 4th quarter, digital only subscription revenues grew approximately 7% to $289,000,000 and total subscription revenues grew approximately 4% to $430,000,000 Both were in line with the guidance we provided last quarter.

Speaker 3

Now turning to advertising. Total advertising revenues for the quarter were $164,000,000 a decline of approximately 8%, which was below our guidance. Digital came in slightly below the low end of our guidance in the quarter, declining approximately 4% to $108,000,000 as advertising demand for some of our products was adversely impacted in the quarter by marketer sensitivity to certain news content adjacencies. Other revenue exceeded our guidance, increasing approximately 10% to $82,000,000 Licensing was a strong contributor and Wirecutter affiliate revenues benefited from a record setting holiday season. Moving now to cost and the progress we're making in driving AOP growth and free cash flow growth.

Speaker 3

We continued to demonstrate cost discipline in Q4. Adjusted operating costs came in better than our guidance, decreasing by approximately 1%. Even as overall adjusted operating costs declined, We continue to allocate resources to our most strategic investments, including world class journalism and the technology and product development that unlocks its digital distribution. Investments in these areas have enabled us to increase penetration of our addressable market, fuel organic subscriber growth and improve our operating leverage. Cost of revenue declined approximately 3%.

Speaker 3

Our continued investments in journalism were more than offset by having 5 fewer days in the quarter as well as lower print production and distribution and advertising servicing costs. Sales and marketing costs were up approximately 9%. We saw high return paid marketing opportunities in the quarter as the bundle continued to enable better marketing efficiency. Product development costs increased 5%, as we continue to strategically invest into the product and technology teams enabling our digital subscriber growth. General and administrative costs were down approximately 1% as we continue to drive efficiencies in non strategic areas.

Speaker 3

As a result of revenue growth and disciplined cost management, AOP increased approximately 9% to $154,000,000 AOP margin was approximately 23% in the quarter, an increase of approximately 160 basis points compared to the prior year. This also translated into strong earnings growth as adjusted diluted EPS increased $0.11 to $0.70 EPS growth in Q4 was also aided by higher interest income and a lower tax I'll now look ahead to Q1 for the consolidated New York Times Company. Total subscription revenues are expected to increase 7% to 9% compared with the Q1 of 2023 and digital only subscription revenues are expected to increase 11% to 14%. Overall advertising revenues are expected to decrease mid single digits, while digital advertising revenues are expected to increase low to high single digits. We continue to experience limited visibility in the advertising market, particularly around ongoing print declines.

Speaker 3

Other revenues are expected to increase mid single digits. Adjusted operating costs are expected to increase 5% to 7%, which reflects an overall commitment to cost discipline as we pursue our growth strategy. Our approach on costs has been to relentlessly reallocate resources from non strategic work to areas of highest impact. At the same time, we intend to continue targeted strategic investments into the independent journalism, news and lifestyle products and technology that position us for growth and market leadership over the long term. We expect that these investments will be reflected in the growth of our cost of revenue and product development expense lines.

Speaker 3

We expect AOP and earnings growth to be weighted to the back half of the year due to the seasonality of advertising and affiliate revenue. I'll close by noting that we remain on track to achieve our previously stated mid term targets for subscribers, AOP growth and capital returns. With that, I'll send it back to Meredith to wrap up.

Speaker 2

Thanks, Will. Our portfolio of differentiated news and lifestyle products is delivering growth and steadily improving unit economics. And we believe our multi revenue stream model makes our business more resilient in a complicated environment. With this foundation, we believe strongly in our ability to create value through a premium product portfolio and world class independent journalism at a time when it is rare and more needed than ever. And now we're happy to take your questions.

Operator

And our first question today comes from Thomas Yea from Morgan Stanley. Please go ahead with your question.

Speaker 4

Thanks so much. I wanted to ask about the evolving relationship Big Tech, I think you've historically approached commercial agreements with the philosophy of being able to drive engagement back to your own properties. And In light of some of the details around the OpenAI litigation and the deal with Apple News, can you maybe just help but dimensionalize the structure of a licensing deal that you would see as Proving not cannibalistic and how do you kind of weigh the benefits and the offsets associated with an opportunity like that?

Speaker 2

Yes. I'll start, Thomas. Good morning. Will can come in behind me as he sees fit. We are you've seen the deals we've done over the last couple of years and you're referring to the one I referenced in my prepared remarks that we've just done with Apple, Apple News Plus for the athletic and wire cutter.

Speaker 2

We're generally looking for 3 things. Does this make sense in the context of our essential subscription strategy by which I mean is it helping us in some way to build direct relationships and that can be through in very direct ways or through helping us grow Audience and awareness for our brands in the case of this partnership we've just built with Apple News Plus and The Athletic, We certainly see it as doing that. And then we look at the dimension of our IP rights Being sort of appropriately respected and used in a responsible way and is there fair value exchange. And I would say any time we look engage with a big tech partner or any partner for that matter, those are the considerations we're making. And I think we've got a Good track record of doing deals that live up to those standards.

Speaker 4

Is attribution still critical to building and reinforcing the overall IP? Like is that something that you would ever

Speaker 2

I want to make sure I understand your question. Maybe try that one more time.

Speaker 4

Yeah. Just in terms of branding and this idea that I think historically with Apple News, the The ability for them to kind of ingest your content into their own platform has, I think, been a little bit of a barrier to your reasoning licensing to them. I was just asking, I think, in the vein of kind of the AI and the proliferation of some of that and the potential loss of attribution if there There is economic model that makes sense for you to kind of forego with some of that.

Speaker 2

Yes. I understand what you're saying. I'll say 2 things both kind of related to what I've already said. One is, I think the most important thing we can do as a business I talked about this a bit in my prepared remarks is to have products that are so valuable at scale and kind of widely understood for their brand marks and the credibility and the trustworthiness They provide that people are inclined to build a direct relationship with us, and will come to us on a very regular basis. So That's the main game we are playing.

Speaker 2

To the extent that there are other ways to tap into the vast arsenal IP that we create every day, that we've created for close to 2 centuries, we are open to that as long as there is fair value exchange and it's supportive of the broader business model.

Speaker 4

Okay. That's helpful. And then maybe just to squeeze one last in for Will. I wanted to revisit the capital allocation philosophy. You reiterated the 50% return of free cash flow over the medium term, But I think you've been pacing a little bit below that in 2023.

Speaker 4

Was there any specific reason that led to a pause in repurchase activity and potential uses of cash that you see as an attractive opportunity to maybe drive organic growth instead? Thank you so much for both.

Speaker 3

Thanks, Thomas. I think you should just take our capital allocation strategy as unchanged that target 50% Over the medium term and we have said, don't expect that sort of to be linear to any quarter, Even any year, over the last 2 years, we've returned 61% in a combination of dividends and share repurchases. And I think you can expect us to continue to track against our target over the midterm. Thanks, Thomas. Operator, let's take our next question, please.

Operator

Our next question comes from David Karnovsky from JPMorgan. Please go ahead with your question.

Speaker 5

Thank you. Meredith, I don't know what you're willing to say on the lawsuit with OpenAI, though any thoughts would be welcome, but maybe separate to that. Are you still in discussions with other AI platforms for potential licensing deals? And can you speak to how discussions might be going in the prospects for any agreements near And then Will, just a question on the outlook. The Q1 cost growth looks to be a touch above the pace of the past few quarters.

Speaker 5

I know sometimes there's timing issues, want to see if there is any call out here and if you could provide any view on the cost trend for the remainder of the year. Thanks.

Speaker 2

I'll start. Thanks for the question. And as you suggest, we're in active litigation. So there's not much I'll say about the case specifically, but more broadly on making deals and this goes a little bit to the way I answered Thomas's question. You've seen the deals we've done over the last couple of years.

Speaker 2

You can imagine we are talking to potential partners all the time. And you've seen directly in the complaint that we're talking to potential generative AI partners. I'd say we are being really selective and Full about what partnership makes sense for us in the context of our strategy and our rights being respected to our IP and fair value exchange for that IP.

Speaker 3

I'll take that cost growth guide question. I'm not going to I don't think there's anything That I'll specifically call out for Q1 simply to say that there can be some variation quarter to quarter and cost growth that you've seen in the past and certainly can expect to see that occasionally. But overall, I think the two themes I hit in my remarks are the things to focus on, which is, Number 1, cost discipline. We're very, very focused on it, relentlessly reallocating resources to areas of high impact and really focusing on leveraging G and A and the sales and marketing lines and getting efficiencies out of places like our print supply chain legacy areas. So that's the number 1.

Speaker 3

And then the number 2 is that we will continue to make targeted strategic investments that we believe are creating value in our journalism and in our product development to really make sure we're investing for the long term and solidifying our competitive position. So I think those are The two themes to hit there.

Speaker 1

Thanks, David. Operator, we can go to our next question, please.

Operator

Our next question comes from Ashton Willis from Evercore ISI. Please go ahead with your question.

Speaker 6

Thank you for the question. I think digital only subscriber ARPU in Q4 was down modestly from Q3. What drove the sequential decline and how should we be thinking about ARPU growth the first half of twenty twenty four as more bundled subscribers are stepped up? And related to this, how are the bundle step ups performing versus your expectations?

Speaker 3

Sure. Let me take that. I mean, I think the way to think about the Sequential decline in ARPU is very much a reflection of things we've seen before, which is a good quarter of net adds. And given the nature of our promotional pricing strategy, we expect to see that when that happens. I think the Important thing for us to focus on obviously the year over year ARPU growth in the quarter and then looking forward, as we said, We expect modest year over year ARPU expansions for digital only subscribers.

Speaker 3

So That's the expectation going forward. I think we have talked I talked about in my remarks the drivers of that expansion in Q4 and I think probably we're saying that that first driver which was those step up, The bigger bundle cohorts as we've been bringing on more and more bundle subs is going to be one of the main drivers in 2024 as well. And I said in my remarks, it's still early. So we have we'll have increasing numbers coming in throughout the year, but we remain encouraged by what we see that bundled subscribers at those step up moments are retaining better and monetizing better than news only subscribers.

Speaker 1

Thank you. Thanks, Ashton. Operator, next question.

Operator

Our next question comes from Doug Arthur from Huber Research Partners. Please go ahead with your question.

Speaker 1

Yes, two questions. Meredith, the deal with Apple News Plus that started Late in Q4, did you get any read through at all or is it on the impact or is it just too early and what kind of are your expectations there?

Speaker 2

Great question. Tiny impact, I think I'm looking at Will and Anthony, if they want to characterize that anymore, but tiny impact just based on the timing, and then obviously bigger impact to come. And There are a handful of things we're particularly excited about in this deal. One is, as we've talked about With you and others, we are very, very focused on building audience and brand awareness and use of the athletic and we see Apple News plus as a great way to do that. Apple is doing a lot of interesting things in sports, Really good partner for us there and The Times has very, very big ambitions for the athletic in sports and we see this as helping us achieve that.

Speaker 2

So it's good in any number of ways and you can expect to see the impact on a go forward basis.

Speaker 1

Okay, great. Thank you. Doug, did you have another question or are you all set? Well, I just I didn't want to beat a dead horse, but it seems like your digital advertising outlook for Q1 is I wouldn't call But it's more constructive I think than what we just witnessed in the Q4 is, I guess just trying to measure your conviction level on that?

Speaker 2

Yes. Well, let me preface it by saying, it's hard advertising is hard to call. We don't have a ton of visibility, but I'll Say a few things. We did see in digital in the 4th quarter A fair amount of what I would describe as marketer news avoidance, you have the war between Israel and Hamas breakout in early October And that had an effect in both display and audio. And at the same time what you see us doing to lap up some of the demand to work with The Times and we're doing this anyway.

Speaker 2

We are extending our ad products very aggressively To other parts of the portfolio beyond news, the athletic and games have been real bright spots So far and we see a lot of running room in both of those places and potentially in Cooking and Wirecutter as well. So I would say we We're long on news over a medium and long term time horizon. We also have a lot of other places to kind of lap up interest in working with The Times for marketers and the core of the business, Doug, which is those premium ad canvases and first party data continues to be resilient.

Speaker 1

Thanks, Doug. Operator, let's take our next question please.

Operator

Our next question comes from Vasily Karasyov from Cannonball Research. Please go ahead with your question.

Speaker 7

Meredith, so Do I understand correctly that when you say in your prepared remarks that the headwinds in the advertising market that carry into this Year 2024, you mentioned the current events, the Middle Eastern situation and so on, the just The advertisers not wanting to advertise next to the content that's driven by current events or is there something more structural Because you also mentioned publisher volatility, and I was wondering if you could explain a little more what that term means?

Speaker 2

Yes. Listen, I think it was a volatile ad market that tends to hit publishers Hard when it happens. We have a lot of what I'm going to call structural confidence in the core of our ad business, Premium canvases and 1st party data and core New York Times now extending out to our other products with a lot of running room is really working. So that's The message I want to convey and I think I answered the other part of your question before. To the extent You're asking how do we think about publishers relative to platforms or any other places that Or in the ad business in a big way, I would say marketers use publishers, they tend to differently than they use the big forms, one of the things we that gives us a lot of confidence is while we tend to get more middle and upper funnel Advertising meaning sort of not direct response more brand in most parts of our portfolio.

Speaker 2

Our ads because of the way we sequence ads the first party data, our ads are really performant. And what you're watching us do is extend those ads across more parts of the platform. And I would say there we just have it's early days on athletic and games and potentially cooking, wire cutter, We think we've got a lot of running room. I'm actually going to use that as a segue to mention an experiment. We're also I'll go back to the question Thomas asked about at the top of the call and I'll talk about ads here too related to your question.

Speaker 2

And it's about AI. We have been using AI in our ad business Sort of the whole way through with 1st party data and I think generative AI presents the opportunity for us to get even better at that. So you can assume we're beginning to experiment with generative AI in our ad products, at least as far as improving our ability to do contextual targeting at scale. And I think that just goes to our sort of structural our confidence in the underlying structure of our Add business and I'll just mention again going back to Thomas's question and the other question I got about generative AI. We are actively experimenting now and you're going to see us do more and more of that with generative AI kind of across the product set.

Speaker 2

So I'll mention, in the Q4, we put out an experiment, relatively Small early days, but exciting in augmenting Spanish language translation For our content, which we're excited about, you can imagine the implications of being able to do that at scale. Again, very early days and we expect to get another experiment out into the market Probably this quarter around synthetic voice, which would help us give people the ability to Listen to a lot of the written New York Times. So that's in addition to using AI and beginning to use generative AI and how we target advertising.

Speaker 7

Thank you very much.

Operator

And ladies and gentlemen, with that, we'll be concluding today's question and answer session. I'd like to turn the floor back over to Anthony DiClemente for any closing remarks.

Speaker 1

That's it. Thank you all for joining us this morning and we very much look forward to talking to you again next quarter. Take care.

Operator

And ladies and gentlemen, with that, the conference has concluded. We thank you for attending today's presentation. You may now disconnect your lines.

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Ellington Financial Q4 2023
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