The New York Times (NYT) almost went bust two years ago.
If not for emergency asset sales, cost cuts, debt-restructuring, and an 11th-hour bailout by Mexican billionaire Carlos Slim, the company's stockholders -- including the Sulzbergers -- would have been wiped out, and the most iconic newspaper in the world would now be under the control of its debtholders.
But the crisis has passed. And The New York Times is now actually in much better shape than most people think -- so much better that its future might even be bright.
We'll get to that possible future in a moment. First let's review everything the company has done in the past few years to stop the train-wreck-in-progress:
- Significantly reduced annual costs. A few rounds of layoffs and plant closures have radically reduced the company's annual expenses, allowing it to be profitable on far lower revenue.
- Increased circulation revenue. Several price hikes on print subscribers have allowed circulation revenue to increase modestly while the rest of the company nearly collapsed. Circulation revenue has recently started to decline, but it has hung in there for much longer than most people expected.
- Eliminated the dividend. Two years ago, NYTCo was handing out125 million a year to its stockholders (mostly the Sulzbergers). That expense is gone.
- Raised cash by selling non-core assets, including the gleaming Times Square headquarters. NYTCo raised a few hundred million precious dollars selling off assets and doing a sale-leaseback on its headquarters. The company also retained the ability to buy the building back in 2016.
- Restructured and reduced debts. This is critical. The reason the company almost went bust is that its credit lines and near-term debt repayment schedule almost bled it dry in a period when it was also seeing big losses in its core business (which were consuming cash). The company escaped this crunch in part by slashing cash costs and in part by borrowing money from Carlos Slim on usurious terms (including giving up options on 10% of the company's equity). Since then, however, NYTCo has refinanced the Slim loan at a perfectly reasonable 6% rate of interest, in part because it has cut enough costs to return to profitability. Now, the company is not on the hook for any major debt repayments until 2015, and if the company's stays profitable, this debt will be easy to roll over.
- Reduced interest costs. By refinancing its Carlos Slim loan and reducing other debts, the NYT's annual interest costs will continue to drop.
So where is The New York Times Company today?
Not in GREAT shape--the core print business is still shrinking--but in vastly better shape than it was two years ago. Importantly, the company is also on the verge of launching a new online paywall strategy that could significantly increase the profitability of its online business AND help preserve the print business for longer than it would otherwise last.
The New York Times Today
First, let's take a look at the company's current financials:
Thanks to radical cost cuts over the past two years, NYTCo will be nicely profitable this year. It also has a comfortable $125 million of cash on its balance sheet, as compared to the ~$25 million it had in the depths of the crisis.
In the first nine months of the year, heading into the most profitable quarter, NYTCo has already booked ~$125 million in operating profit. Just as important, the company has generated $93 million of cash from operations, or about $75 million in free cash flow (after capital expenditures). This cash flow includes a $90 million payment to the pension fund; excluding this payment, FCF would have been $150 million or so.
In other words, for as long as the company can maintain this performance, it should throw off $100-$200 million of free cash flow per year. That puts NYTCo in a vastly stronger position than when it was burning money. The profitability and cash cushion also provides a LOT of flexibility.
So, what does the future look like?
First, thanks to its vastly improved financial performance, NYTCo is investing in growth again -- especially in digital growth. About.com is wildly profitable (~$70 million a year). The company's financial web property DealBook recently doubled down, hiring a large new full-time staff. And the company is (finally) getting ready to launch its paywall strategy.
The company will have to continue to cut costs in its print business as the business shrinks, and it will continue to have to grow its online business. But if it manages these challenges well, it should be able to at least preserve its cash flow, if not grow it.
Most importantly, it should be able to exceed very low expectations.
The NYTCo's paywall plans, for example, have been resoundingly dissed as too little, too late, and purely defensive. Most of the armchair quarterbacks who are snickering about this are missing a few things:
- First, the NYT would be dumb not to try a paywall. If it fails, the company can just remove it--and be no worse off than it is today. The NYTCo's value proposition is "premium content". The company needs to determine now and forever whether this premium content is so premium that people will pay for it, or only slightly premium. The company needs to answer this question for itself, and there's no other way to answer it.
- Second, and more important, the paywall will likely extend the life of the print business. One of the most ludicrous parts of the NYT's current strategy is charging people $700 for the print paper when they can get the same content online for free. One by one, current subscribers will clue into this and cancel their subscriptions. If people have to PAY to get the same content online, however, they'll be less likely to quit the print paper, if only because they'll feel less stupid paying so much for something they can get for free. The longer the company can extend the life of its print business, the better--and a paywall will help.
- The NYT is planning to introduce a smarter version of the paywall than Rupert Murdoch's papers have. Specifically, the company will use a "metered" model, in which light users can still consume a bunch of pages each month for free, and referred readers (from sites like this one) will be able to read one-off articles. This will preserve most of the site's reach, and it will keep most readers happy. It will also preserve the paper's influence in an increasingly digital world. The only folks who will have to pay are folks who eat, sleep, and breathe the NYT. And those folks are the most likely to pay. (Compare this to Murdoch's payWALL, which blocks anyone but subs from reading the content, including sites that might otherwise link to it.
- The NYT's paywall will preserve most of the site's advertising revenue while also adding incremental super-high-margin subscription revenue. How many online subscribers will the company get? Anyone's guess. But the site has a huge online user base to draw on. Importantly, the vast majority of these users will keep reading the NYT as usual, so the user base won't shrink much. If the company can persuade only, say, 1 million people a year (in addition to its print subscriber base) to pay a100 a year fee, this will generate100 million of super-high margin revenue.
Will the paywall strategy restore the glorious economics that the company used to enjoy?
There's no way to replace the $700 of circulation revenue AND ~$400 of ad revenue per subscriber that the print business throws off. But as long as the company can carefully manage the transition to online, and preserve the modest print profits as long as possible, the incremental revenue that the paywall strategy might create should contribute meaningfully to the bottom line.
In short, depending on how the paywall goes and how rapidly the company can continue to grow its digital business, its conceivable that NYTCo could continue to throw off ~$200 million or more of cash a year for the foreseeable future.
Yes, revenue will likely continue to shrink, as the paper business declines, but costs will continue to shrink, too--especially if the company keeps trimming its newsroom costs. But the higher profit margins of the online business should pick up some of the slack, especially if the paywall strategy works.
So, What Is the Company Worth?
NYTCO's stock is currently trading at a 5X enterprise value to EBITDA multiple, which suggests that investors aren't expecting much. (Though this is certainly an improvement over two years ago, when they were expecting a bankruptcy).
Ultimately, like any other company, NYTCo is worth the sum off all the future cash it generates, discounted at a reasonable rate. Depending on your assumptions, 5X EBITDA (10X earnings) might be a reasonable multiple for that earnings stream.
Another way to think about the value today's NYTCo is to do a sum-of-the-parts analysis, looking at both assets and liabilities.
Loosely, there are 4 main assets here:
Managed properly, the newspaper business will throw off a lot of cash before it dies ($500 million? $1 billion?), so its certainly not worthless. But it's also not a growth asset that investors will pay a lot of money for. So let's say it's worth $500 million.
Next, there's the digital business. Some people will scream, but we think it's worth at least $1 billion. Why? Because it has ~$150 million of revenue, 30+ million global readers, and one of the best news brands in the world.
The Boston Red Sox stake is reportedly worth about $200 million.
About.com, which generates about $125 million of revenue and super-high-margin profits of $60 million a year, is worth at least $500 million and probably more.
Add all that up and what do you get?
Asset value of at least $2 billion and probably more.
And what are the company's liabilities?
Add all that up and subtract the cash on the balance sheet and you get about $1.5 billion of liabilities.
Which means that, for the first time in a while, NYTCo's assets are worth more than its liabilities.
The Bottom Line
As noted, NYTCo's future is not entirely bright. The core business is still dying. As it dies, the company will have to continue to reduce the cost structure that it supported, and this may lead to more pain ahead.
But for the first time in the past few years, it seems possible that NYTCo's path forward might NOT involve the radical and painful restructuring that we have long expected. It also might not lead to the company's stockholders getting completely destroyed.
Most importantly, for the folks who work at the New York Times and/or are rabid consumers of the product (digital or print), it seems reasonable to finally breathe a big sigh of relief. The crisis has passed, the emergency cost cuts are through, and the future is much brighter than it has been in a while.
NYTCo could still blow it, of course -- managing the decline of the print business won't be a walk in the park. But before NYTCo management focuses on that, they can probably also take a well-earned vacation.