Description

Executive Summary
The quality, durability, and growth of the New York Times business is underappreciated.  General perceptions of a declining print business, legacy debt/pension loads, and misplaced concerns of transient growth from the Trump news cycle obscure an opportunity to invest in a sustainable fast-growing high-margin digital subscription business with recurring revenue at its inflection point.  Should management’s continued bet on high-quality content and user experience backed by significant investments in technology and data prove successful, long-term investors should earn attractive mid-teens annualized returns over the next decade as a base case which assumes a conservative exit multiple (15x 2030 FCF).  

NYT trades at $51 per share with 168mm shares outstanding and net cash of ~$550mm.  ($8.6bn market cap; $8bn enterprise value).

Underappreciated Quality
The New York Times is a household brand recognized across the globe.  Over the past decade, management has executed an impressive transition away from a business reliant on legacy print subscription/advertising revenue to a high-quality fast-growing differentiated digital platform funded by the surprisingly profitable legacy print business. Management’s thesis was and continues to be a bet that users will pay a premium for journalism differentiated by quality and breadth of content delivered with an engaging user experience. 

Where the broader industry has zigged, the NYT has zagged.  Management’s commitment to doubling down on investments in quality and depth has created an underappreciated advantage that will be difficult for competitors to replicate.  Significant spending on content (increased hiring of top journalists at well above average industry pay) and digital product investment (engineers, product designers, data scientists, tech stack) has resulted in a differentiated product in an industry increasingly focused on volume-based sensationalism driven by ad-revenue incentives.  The NYT has more digital subscribers than the Wall Street Journal, Washington Post, and 250 local Gannet papers – combined. 

While headline news stories are probably similar on average across most of the major news outlets, the NYT stands out in the quality/breadth on other personalized topics (Movies, Music, Style, Food, Real Estate to name a few).  A larger staff of journalists creates an adaptive environment with the ability to mobilize significant resources immediately to emerging stories and quickly changing consumer needs faster than competitors.  Staff are also afforded the flexibility to chase niche/time-intensive investigative stories which competitors cannot spend time/resources on.  The technology team responsible for user experience has proven to be enormously valuable – from the COVID data visualization tracking tools, to the election results “speedometer” that stood out as best resource on election night, to the absolute gems that can be found on the immersive AR/VR/3D web module (https://www.nytimes.com/spotlight/augmented-reality). 

The digital subscription business has significant latent pricing power.  Despite the clear superiority of the digital news product, the print subscription business boasts an ARPU 8x higher than its digital counterpart.  In 2020, for the first time since 2011, management executed a 13% price increase on 690k long-tenured digital subscribers with minimal churn, exceeding internal expectations.  The current focus is growing digital subscriber count but we should expect to see the gap between digital and print ARPU narrow over time.  

In February 2019, management announced a target to achieve 10mm subscribers by 2025 (from 4.3mm as of Q4 2018).  Just two years later (as of Q4 2020) the NYT has 7.5mm subscribers and is well on its way to generously outperform the 2025 target.  Spotify and Netflix have normalized the habit of paying for quality premium monthly subscriptions in a frictionless way – and NYT is directly benefiting from this trend.  Netflix has realized that although it has distribution, it needs to build content in-house to avoid costs growing out of control.  NYT is already a content house and is leveraging that content across new platforms.  

It is increasingly looking like the NYT is operating in a large market where daily habits are up for grabs.  What investors may not be fully appreciating is that the NYT digital business is contributing growth to the overall news TAM.  Today, there are roughly 1bn people who read digital news and over 80mm who pay for digital news globally - this market should only expand over time.  The NYT had 240mm unique visitors in March 2020 and 273mm unique visitors during election week.  Combined with inherent operating leverage in the digital business model, the business is worth multiples from where it is trading today if the NYT can monetize a small fraction of this global addressable market.  

The NYT of today is primarily comprised of the following revenue streams:

• Subscription Revenue (67% of total revenue split evenly between digital and print)

• Digital  

• Paid subscriptions to the NYT News website/app (5.1mm subs as of 12/31/2020)

• Paid subscriptions to NYT Games offerings (primarily Crosswords and Cooking) either Standalone or Bundled w/ News subscriptions (1.6mm subs as of 12/31/2020)

• Print - Paid subscriptions for the Print newspaper product (833k subs as of 12/31/2020)

• Advertising Revenue (22% of total revenue)

• Digital

• Ads delivered on the free/paid NYT News/NYT Games products

• Ads delivered on podcasts including “The Daily” podcast (Launched by NYT in 2017 and today the most listened to podcast in the country), the recently acquired popular “The Serial” podcast, and the rights to sell advertising on the “This American Life” podcast

• Print - Ads displayed on the Print newspaper product

• Other Revenues (11% of total revenue) – A mix of various other revenue streams primarily including:

• Licensing fees paid by Facebook News to display and link to NYT articles

• NYT’s original video programming (“The Weekly”) presented on FX/Hulu

• Referral fees earned from products recommended by The Wirecutter (owned by NYT)

• Real estate lease payments received from tenants occupying NYT’s ownership of 620 Eighth Avenue NYC

• Live events business

Misconceptions
Transient growth concerns
Fears regarding transient growth of the digital platform related to Trump are likely overstated.  While politics is clearly an important driver of news coverage, 80% of NYT’s users read articles beyond politics on a weekly basis.  Interestingly, the cohort of users obtained via the “Trump bump” is one of the best performing cohorts across the subscriber base from a retention perspective.  

From FY2016 through FY2020, paid digital subscribers as a % of monthly average unique visitors increased from 1.5% to 4.9% suggesting investments in content quality, tech user experience, and data have strengthened management’s ability to attract and retain users.  Midway through 2019, a new “free registration” customer journey was launched which requires users to register/log in to view more than one story allowing NYT to better track user engagement.  As the NYT collects additional data, it’s able to better understand user interests – valuable for both paid customer acquisition but also digital advertising monetization.  Monetization rates should only continue to improve over time as further operational insights are paid in dividends from the significant investments made in technology/data. 

Impact of legacy print business in terminal decline
Despite being in terminal decline, the ongoing economics of the legacy print remain quite attractive.  From 2017 to 2020, although print subscribers have dropped ~5.5% year these losses are partially offset by print ARPU increasing ~3.5% per year due to its loyal following.  Importantly, the costs associated with the print business are largely variable.  The primary production and distribution facility in College Point NY is owned by the company (purchased for $7mm in 2019).  The remaining costs are largely variable including raw materials (newsprint and coated paper), utilization of 25 remote print sites under contract across the US, third-party and company delivery drivers, and raw materials.  Management has previously stated expectations that the print business will be around and profitable through 2030. 

Comparing historic print gross profits from 2005-2010 and reverse engineering some insights from management’s recent change in GAAP cost classifications, the print business is likely achieving ~50% gross profit margins today – a testament to pricing increases discussed above and continued operating efficiencies. 

Although this is a high-level directional view, further detail behind the assumptions above is included in Appendix 1. 

Although the NYT suffers from its perception that print is in terminal decline, the print business is likely to generate a declining average of ~$200m per year in contribution margin through the next decade. 

Key Variables and Longer-Term Possibilities
In the following sections I will walk through historical performance and general thoughts on the future for  key drivers of earnings power.  Future estimates over a 10-year forecast period are a very rough base case and moreso intended to illustrate a directional view rather than a precise prediction – allowing the reader to modify assumptions based on your own level of confidence. 

Subscription Revenue
The key driver of shareholder returns over the next decade will be the performance of the digital subscription business.  Digital subs have grown at a 37% annualized rate since 2014.  ARPU has been in steady decline partly for short-term reasons and partly due to change in revenue-mix (Games product and International subs) which weigh down ARPU but increases total subscriber TAM.  

Discounted subscriptions ($1/week promo) are a strong customer acquisition method as it allows the NYT to cement in daily habits before uplifting to full pricing.  Management has continued to see strong retention of these users once pricing is uplifted.  

The “Games” product has clearly been an interesting success story and highlights management’s ability to establish new verticals leveraging the NYT brand – there is plenty of whitespace for additional products to be created with option-like payout (low startup cost with asymmetric upside).   

Given the global reach of the brand, international subscriptions will continue to be a tailwind as international will account for an increasing share of incremental subscriber count growth albeit a headwind for ARPU.  

There is significant latent pricing power that has yet to be realized.  No price increases were applied in the first 9 years of the digital subscription business.  In 2020, 690k long-tenured subscribers were given price raises from $15/month ($180) to $17/month ($204) w/ extremely low churn surpassing management’s internal expectations.  Further ARPU tailwinds should be expected as discounted subscriptions become a smaller percentage of the overall subscriber count.  

In a base case scenario where digital subscriber count and ARPU both grow ~9.5% cagr through 2030, it is easy to see the digital sub business doing $3.6bn in revenue in 2030.  This implies an ARPU of $280 for the news-only digital subscription which is still only 40% of Print subscription ARPU from 2015 ($650) despite materially higher value provided to the consumer.

These forecasts appear reasonable when viewed from the perspective of a) increased monetization of existing visitor base and b) global market share of people who pay for news.   

From 2017 to 2020, although print subscribers have dropped ~5.5% year, declines have been partially offset by print ARPU increasing ~3.5% per year due to its loyal following.  Print subscribers will continue to decline with some offsetting effects through continued price taking. 

Advertising Revenue
Digital Advertising Revenue is primarily comprised of advertised delivered on the free/paid NYT News/NYT Games products as well as advertisements delivered on various podcasts. 

The more traditional digital advertising business (related to NYT News/Games products) is in the process of transitioning away from a creatively led 3rd party data model to a 1st party audience-targeting model.  The first major transitional step was the new “free registration” customer journey initiated midway through 2019, requiring users to register/log in to view more than one story – opening the doors to building unique proprietary customer data segments and weaning off of 3rd party data.  Although this transition has created short-term declines in digital ad revenue (attributed to closure of the NYT internal digital ad agency ‘Fake Love’ and removing open-market programmatic advertising from the app), the transition to a higher-quality digital advertising strategy may reignite growth in this segment over the longer term (albeit tricky to forecast). 

Podcast revenue has been a tailwind over the past few years due to the success of “The Daily” Podcast which is one of the top podcasts in the world.  The Daily was launched in 2017 and today receives 4mm downloads per daily episode.  In addition to monetizing through ad revenue,  The Daily serves as a distribution vehicle for new NYT products as well as a low-cost acquisition channel for the traditional digital products. The NYT also recently acquired “The Serial” podcast as well as the rights to sell advertising on the “This American Life” podcast.   

Print advertising revenue suffers from the continued terminal decline of the printing business but cannot be offset by the ARPU dynamics relevant to the subscription business.  Between 2015 through 2019, print advertising revenue declined by ~11.5% annualized – followed by amplified declines in 2020 of 40% partially due to COVID.

Other Revenue
“Other” revenues are comprised of various small but promising revenue streams which have collectively grown 22% annualized from 2015-2019 and 17% annualized 2015-2020 (impacted by COVID).  “Other’ revenues can be further segmented into Digital (40% of 2019 Other revenues) and Non-Digital (60% of 2019 Other revenues). 

In 2019, NYT signed an agreement with Facebook to receive licensing payments for hosting NYT articles on the “Facebook News” section of its app.  NYT feels strongly that the user experience should be provided on the NYT digital platform and was willing to do a deal with Facebook as the Facebook News app simply links to the actual NYT website/app and provided sufficient compensation to the NYTimes (NYT recently cut ties with Apple News due to similar dynamics).  

The “Other” revenue segment also includes revenues related to the following:

- NYT’s original video programming (“The Weekly”) presented on FX/Hulu
- Affiliate referral fees earned from products recommended by The Wirecutter (owned by NYT)
- Real estate lease payments received from tenants occupying NYT’s ownership of 620 Eighth Avenue NYC
- Live events business

Many of these segments had short-term negative impacts due to COVID (lack of new episodes for The Weekly, Live events business etc).   Modest growth is expected over the longer-term.   

Total Revenue
Total revenue is the result of the above three sections (Subscription Revenue, Advertising Revenue, and Other Revenue). 

Total Production Costs / Gross Profit
Historic gross margins

In order to forecast gross profits using incremental gross profit margins, attribution of historical (2018-2020) Total Production Costs separately to Print, Digital, and Other revenues needs to be estimated. 

Leveraging the Print business economics analysis discussed above (and detailed further in Appendix 1), I assume a gross profit margin for the print business of ~55%. 

Further assumptions regarding the mix of remaining Total Production Costs (i.e. remaining costs not attributed to the 55% GP of the print business) is required.  I assume 75% of these remaining costs are attributable to digital given the significant investments being made to enhance the digital offering. 

Forecasted incremental gross margins

Although most of the print cost structure is variable as described above, with any fixed costs likely booked to G&A, I reduce gross profit margin by 2% a year for conservatism as the business continues to decline.  

Incremental gross margins across the Digital and Other revenue streams should prove attractive given the operating leverage inherent in these businesses. 

Operating Expenses
Remaining operating costs include Sales and Marketing, Product Development, General and Administrative, and Depreciation/Amortization.  Although operating leverage is relevant to each of these categories, significant investment in the business is expected as management continues to focus on growth of the subscriber base and increasing the value proposition for consumers. 

Management does not disclose Lifetime Value or Customer Acquisition costs, but has stated that churn was reduced in half between 2015 and 2018 in addition to general positive statements on churn related to price increases for $1/week discounted subs and long-tenured subs (as noted earlier in this write-up).  

I found the following cohort data on the internet that is somewhat informative and consistent with management’s statements that the “Trump” cohort is among the strongest in terms of retention.  Source: https://www.earnestresearch.com/earnings-by-earnest-2q-2018/

I’ve made the following assumptions to generally assess the productivity of sales & marketing expenses (note that an embedded conservative assumption here is that all sales/marketing goes to acquiring digital subscribers).   These very rough estimations suggest that organic S&M growth is very much +ROIC to date.  

Bottom Line and Valuation
$1.6bn of free cash flow in 2030 seems entirely achievable given the quality of the business and tailwinds described in the above sections.  At that time, the business will be generating very attractive EBIT margins and growing free cash flow at low/mid double-digits.  For a business with these attributes, a ~15x free cash flow multiple is conservative under any reasonable interest rate regime and provides a margin of safety.  Investors with a long-term horizon who agree on the quality and growth tailwinds available to the business would see ~15% annualized returns over the course of a decade.  Even entirely eliminating the “cash build” line (assuming breakeven through 2030) would yield ~12.5% annualized.

Appendix 1
For those interested in further detail regarding estimates made in arriving at the print cost structure and the detail regarding the costs included within each GAAP line, please see the screenshots below.  Please note that the print analysis is very rough and not very material to the overall thesis.  

Risks
- The NYT has been a family-owned business for over a century.  The legacy family controls Class B shares which primarily give the advantage of controlling 70% of the Board making a sale/activism unlikely.  This structure may also incentivize empire building over rational economic spending – and a key risk driver to watch will be scaling of opex costs over time.
- Market size/TAM smaller than expected
- Poor acquisitions / bolt-on investments with excess cash

Catalyst

-Continued realization of growth in a post- Trump news cycle
-Margin expansion becoming evident within the financials