STOCK BRIEF | New York Times (NYT) 3Q23 Earnings Preview

NYT Digital Business

1. Digital Advertising

• In Q2, advertising came in better than expected. Management's guidance for Q3 was based on the sentiment around the Q2 print, which was optimistic given improvements to advertising in the latter part of the summer.

• Overall advertising is expected to be flat while digital advertising is supposed to grow MSD. This implies a HSD decrease, at minimum, for print advertising, which is consistent with the last two quarters.

• We are modeling digital advertising to increase HSD (8%) based on Q2's results and the strength we've seen around the industry thus far. Given the guide was soft in Q2 and digital advertising has been strong, as well as Gannett's report last week signaling stronger than expected digital advertising, we think a YoY increase and a sequential improvement is doable for the Times'.

• In addition to all this, we've seen an increase in MAUs (Figures A and B) and downloads (Figure C), as well as a positive inflection in growth for web traffic through October. This will all result in more ad impressions.

• The New York Times MAU growth reaccelerated from -13.5% YoY in September to -9.5% YoY in October and still holds the lions' share of MAUs amongst their competitors in the news landscape. On top of that, the NYT Games app continues to grow at breakneck pace, accelerating MAUs to 148.5% YoY in October from 111.7% YoY in September. In terms of downloads, NYT (across NYT App and Games App) grew 59.6% in October, accelerating from 49.8% in September, mainly driven by the games app but supported by trends improving with the main NYT app as well. The strength in the Games app is likely due to the new game launched at the very end of August, 'Connections'. It had been in beta testing since June, but right around the beginning of September, it went live on the NYT Games app on the App Store and Google Play.

• Web traffic also improved marginally. After declining through much of the last 6 months on a YoY basis, organic web traffic to NYTimes.com inflected positively in October by almost 200bps sequentially. This is likely due to the coverage of the conflict in the middle east right now, which the Times has been covering extensively.

• Regarding geopolitical concerns, they have been a point of caution for the large digital advertisers. Thus far, we haven't heard anything to raise the alarm for NY Times advertising. Gannett, again, reported a strong quarter. Looking back historically, we see in 1Q22 (Invasion of Ukraine) digital advertising grew 12.6%. While this was a sequential deceleration, it was also comping against 16% YoY growth in 1Q21, and 2021 as a whole comped against double-digit YoY declines during the 2020 when COVID-19 started (Figure D). While geopolitical events always pose a risk to advertising, we don't have enough evidence to say that digital advertising will be negatively affected by the conflict in the middle east. Historical comps as well as commentary from Gannett and other digital advertising names have shown us that those revenues have been resilient thus far in Q3.

2. Digital Subscription

• Bloomberg CC Data  is showing that  average transaction value has accelerated 3 of the last 4 quarters to 10.6% YoY this quarter (Figure E), and that series has the highest correlation with reported revenue growth. Please note, however, that the correlation is not statistically significant. The data series for average transaction value just reports the average value of each transaction in USD in a selected period.

• We're likely seeing the effects of lapping of last years' promotional cohort pricing up at a higher rate than previous years. In the past, management has disclosed that above 50% of promotional customers tend to take the full priced bundle when their promotional year is up. Looking at the credit card data and the model, along with the guidance for advertising revenue, the increase in average transaction value seems to imply that more people are taking the full price instead of churning off. Digital ARPU was 9.15 as of last quarter - with the News-only product being phased out (no longer available for purchase), the only way to increase digital ARPU is to have more full-price bundle customers.

• With advertising revenue expected to be flat and digital subscription revenue expected to increase 14-17%, the only way I can get my numbers higher is by increasing the subscriber mix between the promotional plan and the full price bundle plan for this quarter. We could see significant growth in ARPU for other subscription plans, but digital-only revenue is really driven by the bundle. So increasing that mix of subscribers paying full price on the bundle compared to a year ago drives that bundle ARPU number and gives me the upside in the digital-only subscription results that are implied by this credit card data.

• Our view is that the bundle and multiproduct ARPU number, while still declining on a YoY and QoQ basis, will come in stronger than expected as the Times' priced up incrementally more subs than the 50% we've been told in the past. If more subs are priced up, that digital subscription revenue number should be closer to the guided range than consensus estimates currently have it at.

Figure A.

Figure B.

Figure C.

Figure D.

Figure E.