The New York Times Co (NYSE: NYT) – Investment Report/Fundamental Dive

Introduction
The New York Times (NYSE: NYT) is a global media organization which produces and distributes
reliable, quality news to readers. The Times is separated into separate business segments which
includes the NYTimes.com website, the New York Times physical paper, their standalone mobile
applications (Crossword and Cooking), their podcast portfolio (The Daily, Serial productions), and
smaller components (Facebook licensing agreement, Wirecutter). They generate revenues primarily
from Subscriptions (67% of FY 2020 Revenue) and Advertising (22%) within these segments.

Over the past five years, opportunity has formed for the Times as they have reinvented
themselves from a struggling, low-margin advertisement-focused business to a thriving subscription-
based model, emphasizing the production of quality journalism at a fair price.

Lack of Integration and the Digital Pivot

The past 10 years, the problem facing many traditional media organizations, was an inability to
integrate digital tools into distribution/workflow. Upstart competitors such as Vox or Huffington Post
were eclipsing Times in terms of traffic, as they were first to heavily utilize social media in their
workflow to promote and distribute their stories, while the Times had yet invest substantially in social
media or their digital platform.

Highlighted in the Times’ 2015 internal report, “The Innovation Report”, was a shift in what
defined successful content distribution. This was something legacy organizations had failed to
understand, which were still, “largely print newsrooms with digital operations bolted on.”

As examples…

“But BuzzFeed, Huffington Post and USA Today are not succeeding simply because of lists, quizzes,
celebrity photos and sports coverage. They are succeeding because of their sophisticated social, search
and community-building tools and strategies, and often in spite of their content.”
“The percentage of readers who visit BuzzFeed through social, for example, is more than six times
greater than at The Times. They have learned, among other, that a great Facebook post has become a
better promotional device than a head-line and that the impact of social is even greater on mobile”
“Companies like Huffington Post and BuzzFeed have, in just a few years, eclipsed our traffic by building
best practices for search and social into their workflow. For example, at The Huffington Post, a story
cannot be published unless it has a photo, a search headline, a tweet and a Facebook”

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 Acknowledging this systemic issue, in 2015, the Times announced their pivot as “digital-first”
company, now focusing heavily on growing their digital platforms.
Since then, the absolute priority of capital use has been in developing the newsroom (with total
staff increasing by 27.5% since 2013) and investing in alternative media platforms to spread Times
journalism and brand awareness (mobile applications, podcast portfolio, The Weekly TV show). For a
~170 year old organization, the Times has reentered a growth stage in its life.
With the sentiment of change wholeheartedly adopted by management...
“We will continue adding digital product talent, engineers, product designers, data scientists and
product managers, whose work will make our journalism more accessible, engaging and impactful. Our
investment in product work is already helping The Times begin to meet more news needs. In 2020, we
improved our experience for up-to-the-minute coverage, expanded our use of visual and data
journalism, created new story formats and began to personalize aspects of our customer journey, all of
which are beginning to drive increased engagement.”
While also remaining selective/intelligent regarding distribution, demonstrated by their
relationships with Facebook vs. Apple News:
“And ultimately, that Facebook News tab is going to feed your funnel. It's going to drive people directly
to The Times." So in that instance, it makes sense for The Times to participate, and we feel good about
that participation. Apple News, we made a different choice. We took The Times off of Apple News
because in many ways, we saw it as a replacement product, and we see an opportunity to actually
bring people to destination New York Times for a full look at the news”
In 2020, the Times acquired Serial Productions, which gave them ownership of popular
podcasts such as “Nice White Parents” or “This American Life”. Partnership with Google brings Times
articles near the top of search results. Their “Crossword” and “Cooking” applications are popular
among their target audiences, near the tops of their respective charts.
Already, podcasts such as their flagship “The Daily”, have become a highly acclaimed source of
news with more than 2 million listeners downloading each episode, with 75% of this audience being 40
years old or younger, and 45% is 30 years old or younger, representing significant millennial
engagement. When comparing this to the 1.5M subscribers at the peak of the physical paper, it’s clear
digital has long since surpassed print at the Times.
As the Times develops their mobile applications, podcasts, and other forms of media, these
aren’t only profitable activities for the company, but avenues for millions in a younger, wider
demographic of readers to discover and interact with the Times brand/journalism.

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Inflection Point and the Road Ahead:

Now, five years since the strategic shift was first announced, the Times recently reached an
important milestone for their Digital Subscription segment to surpass their legacy businesses in Print
and Advertising. For context, print revenue per subscriber has historically been significantly higher than
digital news revenue per subscriber, shown below. The current ratio of Average Revenue per
Subscriber (ARPS) of print to digital is ~6x. This means for digital news subscription revenue to equal
print, you would currently need a digital subscriber base six times greater than print. In Q3 2020, the
NYT finally accomplished this as digital subscription revenues overtook print revenues for the first
time.

Average Annual Revenue Per Subscriber

800
700
600
500
400
300
200
100
-
FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020

Digital News Digital Other Print

(Digital Subscription Revenue Per User Remains at a Fraction of Print)

Proportion Comparison
700%
600%
500%
400%
300%
200%
100%
0%
Q3 2019
Q1 2015
Q2 2015
Q3 2015
Q4 2015
Q1 2016
Q2 2016
Q3 2016
Q4 2016
Q1 2017
Q2 2017
Q3 2017
Q4 2017
Q1 2018
Q2 2018
Q3 2018
Q4 2018
Q1 2019
Q2 2019

Q4 2019
Q1 2020
Q2 2020
Q3 2020
Q4 2020

Digital/Print Revenue Per User Digital/Print Subscribers

(Digital Subscribers Cross the ~6x Threshold in Q3 2020)

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 Yet over the years, the transformation in the Times has been masked behind immediate larger
declines in their advertising and print segments. Despite the Times’ ~466% growth in digital news
subscriptions over the past five years, the Times has been overlooked by many as Total Revenue has
shown only a ~12.9% increase over past five years, shown below.

This recent milestone solidifies the notion that investors should no longer gauge the Times’
worth based on its legacy segments, but rather as a “fast-growing, scaling, differentiated, direct-to-
consumer digital subscription product with a large addressable audience and a big opportunity to gain
much more of that audience”.

Subscriptions By Category
6000
5000
4000
3000
2000
1000
0
FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020

Digital News Subscribers Digital Other Subscribers Print Subscribers

(Massive Growth in Highly-Scalable Digital Subscriptions….)

Total Annual Revenues

2000

1500

1000

500

0
FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020

(….Hidden Behind Modest Growth in Revenues….)

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 Segmented Annual Revenue
800000
700000
600000
500000
400000
300000
200000
100000
0
FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020

Digital Revenues Print Revenues Advertising Revenues Other Rev

(.…Taking a Closer Look, Large Declines in Advertising Revenues, and a Steady Downward Trend
in Print Revenues, Masks the Growth of the Digital Segment)

However, looking at the chart above, it doesn’t seem to be the case that the Times has entirely
abandoned advertising and print, in fact these segments still make up a significant portion of revenues.

Rather, it appears that they have shifted advertising focus onto digital-audio platforms such as
the Daily. To management, the surprising resilience of print revenues is indicative of the inherent value
of the Times product:

“The thing that has surprised me the most in my 7 years working at The Times is just the resilience of
that print subscription line and sort of the overall revenue picture of The Times. So it has kind of
hovered at or around $600 million for basically the whole time I've been at The Times. And there are 2
things going on there. One is it is an incredibly loyal audience; and two, that pays a lot of money for the
product. And that just hasn't changed. Even as we've come down a little bit sort of year-over-year in
print subscriptions, we are able to get people to pay more, particularly tenured subscribers to pay
more. So if you get 7-day-a-week kind of delivery for The New York Times, today, you are likely paying
well in excess of $1,000.”
Management has placed much emphasis on this ~$1,000 annual print figure, consistently citing
this as evidence of the potential pricing power for digital subscriptions, which are currently introduced
to subscribers at $1/week or $52/year. However, looking at the “Average Annual Revenue Per
Subscriber” chart above, DN ARPU has trended downwards significantly for the past five years, as the
Times continues to bring in subscribers at heavily discounted prices, diluting the overall figure.
Management has repeatedly expressed positive sentiment on subscriber churn, but does not provide
clear figures to investors. As of now, it is unclear where DN ARPU may finally stabilize .

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The Virtuous Cycle – A Flywheel Model

What is fascinating is that the competitive advantages of the Times combine to form a “virtuous
cycle”, as referred to by management. An important strength of theirs is the authority which comes
with the New York Times brand. The organization has operated since 1851, and with 127 Pulitzer
Prizes, the Times holds the most of any news organization. The Times also holds the largest paid-
subscription base among fellow paid-digital newsletters, followed by the Washington Post.

This prestigious reputation of the Times has been vital to building a newsroom comprised of the
world’s best journalists, who continue to produce the meaningful, differentiated content which is what
ultimately attract and retains additional subscribers.

The larger the subscriber base grows, the more Times can reinvest profits back into the quality
of its Journalism and spreads fixed costs over an expanding subscription base, resulting in powerful
economies of scale. It is a perpetual cycle which combines talented reporters, quality journalism, and
powerful operating leverage, to reinforce the competitive position of the Times.

Operating Leverage/Subscription Competitor Comparison:

While not evident in their current financials, this operating leverage will become immensely
more significant as subscriber count grows.

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 Throughout conference calls, management draws the most comparison towards subscription
platforms such as Netflix or Spotify as comparables. In context, this makes perfect sense. All three are
highly scalable, digital subscription platforms at the respective tops of their industries. Yet what is
incredible to think about is the inherent cost advantages of the Times when compared to even these
peers, when you consider the content each produces.

Netflix provides entertainment by acquires licensing rights for TV shows/movies or directly

produces its own content. Spotify pays royalties to artists to host their music. The Times distributes
digital articles written by their journalists (among other things). These are vastly different products,
with differing cost structures and capital intensity. From a cost perspective the Times is the clear
winner.

Consider this, Netflix reportedly invested ~$17B into content in 2020, with the Crown
reportedly costing Netflix ~$130M per season to produce. The Times relies on their 1,700 strong
newsroom to produce their own, branded and fully owned content, with an average journalist’s salary
ranging between ~$87-130K annually (Glassdoor). This means, it could hypothetically cost the NYT just
~$130M-214M in salaries to finance most of their original content, in comparison.

Take the Times’ expansion into Canada as an example…

“And the best example of this is we had a few reporters, I rarely think 3 or 4, working in Canada, and a
few years ago, we decided to make a sizable push into Canada. And so that meant we doubled the size.
That's a small handful of people added to great effect in terms of The Times, its presence in the lives of
Canadians. And I think you could imagine that replicated across geographies, you can imagine that
replicated across topics. And if you put that in contrast to how it works in entertainment or music right
now, if you're Netflix, you have to spend enormously into programming to assume you're going to get
that next cohort of subscribers.”

According to management…

“the basic idea is that once you've got an essentially fixed cost base of a newsroom and investment in
product, digital products and established ways of doing things like digital marketing and you go on
scaling, operating leverage gets very interesting, indeed, and that happens pretty quickly.”

With even marketing costs declining with scale…

“The way we think about subscriber acquisition cost is we believe that the product, the actual news
product and the other products should do more of the work of conversion and the paid marketing
should do somewhat less.”

“I mean -- and we've seen 1 or 2 quite promising signs of that in recent quarters. The 2 quarters of
spectacular growth in subscriber numbers, but with actually seeing the marketing cost line is actually
going down in those quarters”

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Valuation (Model Included in Appendix)

In valuing the Times, the main emphasis should placed on estimating their future total
subscriber count. Management has mentioned over numerous earnings calls that they estimate their
Total Addressable Market (TAM) to be ~100M subscribers who are willing to pay for quality, English
journalism. However, they have been equally ambitious and vague in disclosing the size of this market
they expect to capture, with estimates ranging between 20-40M subscribers.
“We're at -- if you take to our expectation of the TAM at $100 million, today, we have 7.5% of
that. No reason we can't have 2, 3, 4 times that over time, maybe even more.”

This gives us a potential, albeit wide, ceiling from which to base our estimates.

(Disclaimer, the following models are estimates, subject to judgement error, and are included to
demonstrate the potential range in eventual size, as opposed providing exact figures)

Using a regression model, we estimate the future trajectory of subscriber growth for each of
their defined subscription segments (Digital News, Digital Other, and Print).

Summarizing our findings from the model, it predicts that by the end of FY 2025, Digital News
subscribers will have increased to ~17.6M (currently 5.0M ), Digital Other subscribers will grow to
~13M (currently 1.6M) and Print subscribers will have fallen to .6M (currently .8M).

These predictions for Digital News and Print Subscribers seem reasonable (Digital News has
subscribers by ~432% over the past 5 years). At ~18M Subscribers, this remains at the conservative end
of management guidance. However, our Digital Other subscriber estimate seems much higher than
reasonable, so it will be adjusted downward during valuation.

Assuming ARPS settles at $100, $41, and $815 for Digital News Subscribers, Other Digital
Product Subscribers, and Print Subscribers respectively, this represents a potential ~$2.5B in combined
Subscription Revenue (111% Increase from FY2020) by FY 2025.

Also, assuming Advertising Revenue maintains its current downward trajectory and Other
Revenue remains stable over the next five years (a ~13% decline for Total Non-Subscription Revenue),
this implies Total Revenue of ~$3B by the end of FY2025 (a ~66% increase from FY2020).

Regarding Operating Costs, it’s likely safe to assume they won’t increase at a rate beyond what
we’ve seen over the past five years while the Times were developing their digital platform, so we
project an increase to ~$1.9B by FY 2025 based on historical trends (20% Increase from FY2020).

Under these assumptions, their advantage in leverage becomes apparent as Projected

Operating Profit increases to ~$1.0B (~487% Increase from FY 2020) given only a ~66% increase in Total
Revenue.

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 The Times has deleveraged significantly over the past few years, and currently holds an
extremely stable financial position. They have $0 in Total Debt and Capital Lease Obligations, with
$882M in Cash and Marketable Securities available to fund operations and strategic expansion. And
while their Total Plans are underfunded by ~223M (12.4%), the majority is due to their Non-Qualified
Plans reserved for executives, as their Qualified Plans dedicated towards general employees are
overfunded by ~36M.

Applying a 4.0-6.0x Revenue Multiple range, and 12.5-17.5x Operating Income Multiple range,
and adding back Cash and Securities gives a price target of between ~$80-$100/share over the next
five years, under very reasonable estimates.

Conclusion

The Times represents a business which has proven itself able to adapt to the digital age and is
well positioned to expand further in subscriber growth and societal influence as an authoritative
source of news. Its business model is one which incentivizes excellent journalism, with margins growing
alongside size due to operating leverage. With $0 in debt and ~$880M in liquidity available to deploy as
well, the Times has a rock solid balance sheet and also the flexibility to experiment further with its
capital as well. It is largely undervalued from a long-term growth perspective and represents an
attractive investment as a high-quality, Fischer-style compounder over foreseeable future.

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Appendix - Valuation Models Expanded
Growth in Subscriber Base Predicted Using Log-Linear Regression Model (Digital Other Will Be
Adjusted Downward During Valuation)

Segmented Subscriber Growth Graphically Illustrated

Subscription Growth Projection

35000
30000
25000
20000
15000
10000
5000
0
Q2 2019
Q4 2011
Q2 2012
Q4 2012
Q2 2013
Q4 2013
Q2 2014
Q4 2014
Q2 2015
Q4 2015
Q2 2016
Q4 2016
Q2 2017
Q4 2017
Q2 2018
Q4 2018

Q4 2019
Q2 2020
Q4 2020
Q2 2021E
Q4 2021E
Q2 2022E
Q4 2022E
Q2 2023E
Q4 2023E
Q2 2024E
Q4 2024E
Q2 2025E
Q4 2025E

Print Subscribers Digital News Other Product Subscribers

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 Calculation of FY 2025 Revenue Per Subscription Segment (Data Range Selected for our Valuation
Highlighted)

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 Summary FY 2025 Income Statement - Sensitivity Analysis

Enterprise Value Sensitivity Analysis

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 Equity Value Sensitivity Analysis

Implied Price Per Share

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