Good morning, and welcome to The New York Times Company's first quarter 2017 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Harlan Toplitzky, Executive Director of Investor Relations and Financial Planning and Analysis. Please go ahead.
Thank you, and welcome to The New York Times Company's first quarter 2017 earnings conference call. On the call today, we have Mark Thompson, President and Chief Executive Officer, Jim Follo, Executive Vice President and Chief Financial Officer, and Meredith Kopit Levien, Executive Vice President and Chief Revenue Officer. Before we begin, I would like to remind you that management will make forward-looking statements during the course of this call, and our actual results could differ materially. Some of the risks and uncertainties that could impact our business are included in our 2016 10-K. 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, which is available on our website at investors.nytco.com. With that, I will turn the call over to Mark Thompson.
Thanks, Harlan, and good morning, everyone. Q1 2017 was a very encouraging quarter for The New York Times Company. Digital revenue was strongly up year-over-year across the board. Print consumer revenue was also up, as was overall revenue for the company. Despite continued headwinds in print advertising, adjusted operating profit also grew, albeit modestly. These numbers, we believe, validate our thesis that there is a large and growing appetite in this country and around the world for journalism of seriousness and depth, and that a growing number of people are prepared to pay for it in digital as well as in print. They also support our view that quality news is a relationship business. Social media and other digital platforms can be valuable as a way of enabling users, especially new users, to encounter and sample high-quality news.
Thoughtful readers will always want to know the provenance of the news, who reported it, who edited it, who is ultimately responsible for its accuracy and fairness. This is why we believe in building a strong digital destination for news and encouraging our most engaged readers to make us a daily habit. We also believe that when it comes to advertising, the world's best companies want the same things as thoughtful readers, digital environments where their brands are safe and they won't find themselves next to dishonest or tawdry content, and where they can associate themselves with journalism of quality and ambition. In the chaotic landscape of digital advertising, we believe that the guarantee of quality that we apply to our journalism is also a guarantee of safety and value for our advertisers.
Let me turn now to the detail of the results, beginning with our digital consumer business. In the quarter, we added 308,000 net digital-only new subscriptions, the largest quarterly addition in the history of our pay model. We've also seen exceptional growth in our digital crossword business, adding 40,000 subscriptions this quarter. Total subscriptions combining digital news and crossword subs with our print home delivery subscriptions stood at 3.2 million at the end of the quarter. We saw some moderation in the rate of new subscription adds to our news product towards the end of the quarter and expect that moderation to continue through Q2. I want to emphasize, though, that our digital subscription business had started to accelerate long before the 2016 presidential election cycle got into its stride.
The acceleration was driven by data-driven adjustments to our pay model and greatly improved execution in our consumer marketing department. We have more improvements in the works, and we're confident that even after the intensity of the current news environment subsides, this underlying acceleration will continue. We also saw exceptional growth in digital advertising in Q1 with a 19% year-over-year increase. Our strategy to pivot the business to focus on smartphone, branded content, innovation and marketing, and creative services is paying off. Print advertising remained tough with a decline of 18% year-over-year in the quarter. It's a testimony to just how far our business has already transitioned towards digital that this steep decline did not stop us from growing our total revenue significantly in the quarter.
When I arrived at The Times four and a half years ago, print advertising was such an important part of the company's economics that the idea of growing total revenue in the face of such stiff headwinds would have been unthinkable. The dynamism of our digital businesses now makes it possible. Costs rose in the quarter, largely because of higher marketing expenses, not all of which will repeat in subsequent quarters, and the inclusion of costs from acquired companies. Despite this increase in costs, the fact that total revenue for the company grew 5% in the quarter enabled us to grow adjusted operating profit slightly as well. Let me finish with a few words about Times journalism. During the quarter, we launched the brand advertising campaign based on the proposition that the truth is hard.
It struck a chord not just in America, but around the world, and has been very widely commented upon. Even the President of the United States was kind enough to draw attention to it. The campaign makes the case for the kind of deeply reported, courageous, and serious journalism that The New York Times has always stood for. That journalism is as strong today as it's ever been. In recent weeks, it's been recognized with an astonishing crop of awards, including three more Pulitzers. We've also seen some exciting new talent arriving in both our newsroom and in our editorial department. Our new Deputy Managing Editor, Rebecca Blumenstein, and new Business Editor, Ellen Pollock, are now working together to reshape how the Times covers business and financial news. T Magazine has a new editor, Hanya Yanagihara, who will plot the future direction of one of the world's preeminent style magazines.
Our editorial page editor, James Bennet, recently brought the Pulitzer Prize-winning columnist, Bret Stephens, to our op-ed pages. We're now in rapid transition from a celebrated past as a great American newspaper to a future of even greater potential as a subscription-first, mobile-first news provider for thoughtful audiences everywhere. One of the things that gives us most confidence as we execute this transition is our access to talent, both the world-class talent we already have and the exceptional talent we can attract into the company, talent like Rebecca, Ellen, Hanya, and Bret, and other new colleagues in every part of the Times. We are fully committed to the investment needed to maintain outstanding frontline reporting. Indeed, as I noted in our last earnings call, we've actually boosted the newsroom budget in some critical areas.
My colleague, Dean Baquet, has also made it clear that our newsroom needs to adapt and develop if we're to seize the opportunity in front of us. The recent 2020 report set out some important recommendations for change, including the need to approach the task of editing our news report in a new way. You can expect to hear more about that, and about plans to recruit further new journalistic expertise and talent over the course of the present quarter. In February, we introduced The Daily, a new audio report that's already had more than 27 million downloads and streams and is on track to surpass 100 million in its first year. The Daily is a new way to encounter Times journalism and to get a behind-the-scenes flavor of what Times journalists do.
Its freshness of style and the warmth and brilliance of its host, Michael Barbaro, have already made it an unmissable pleasure for its large and growing audience. Whether in audio, virtual and augmented reality, in digital products like our new offering for Snapchat, or in ad formats, innovation is helping us to find new users and drive new revenue streams. Now let me turn it over to Jim for a more detailed financial review.
Thank you, Mark, and good morning, everyone. As Mark said, the first quarter results reflect a solid growth. Adjusted diluted earnings per share was 11 cents in the first quarter, compared to 10 cents in the prior year. We recorded GAAP operating profit of approximately $29 million, compared to an operating profit of $28 million in the same period of 2016. Overall revenues are up 5% in the quarter as strong consumer, both print and digital, as well as digital advertising revenues more than offset continued weakness in print advertising. Total consumer revenues increased by 11% in the quarter, with digital-only subscription revenue continuing to grow strongly, up 40% to $76 million. Both our core news and crossword product revenues grew at this rate in the quarter.
On the print circulation side, revenues were nearly two percentage points higher as home delivery revenues more than offset a decline in revenue from single copy sales. Home delivery revenues increased in the quarter compared to the prior year, as home delivery price increase in early 2007 more than offset volume declines. Total daily circulation declined by 4.7% in the quarter compared to the prior year, while Sunday circulation was flat. As was the case last quarter, ARPU continued to decline in the first quarter, largely due to the sharp increase in net subscription additions, most of which start on a promotional-
Good morning, and welcome to The New York Times Company's first quarter 2017 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Harlan Toplitzky, Executive Director of Investor Relations and Financial Planning and Analysis. Please go ahead.
Thank you, and welcome to The New York Times Company's first quarter 2017 earnings conference call. On the call today we have Mark Thompson, President and Chief Executive Officer, Jim Follo, Executive Vice President and Chief Financial Officer, and Meredith Kopit Levien, Executive Vice President and Chief Revenue Officer. Before we begin, I would like to remind you that management will make forward-looking statements during the course of this call and our actual results could differ materially. Some of the risks and uncertainties that could impact our business are included in our 2016 10-K. 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, which is available on our website at investors.nytco.com. With that, I will turn the call over to Mark Thompson.
Thanks, Harlan, and good morning, everyone.
Q1 2017 was a very encouraging quarter for The New York Times Company. Digital revenue was strongly up year over year across the board. Print consumer revenue was also up, as was overall revenue for the company. Despite continued headwinds in print advertising, adjusted operating profit also grew, albeit modestly. These numbers, we believe, validate our thesis that there is a large and growing appetite in this country and around the world for journalism of seriousness and depth, and that a growing number of people are prepared to pay for it in digital as well as in print. They also support our view that quality news is a relationship business. Social media and other digital platforms can be valuable as a way of enabling users, especially new users, to encounter and sample high-quality news.
Thoughtful readers will always want to know the provenance of the news, who reported it, who edited it, who is ultimately responsible for its accuracy and fairness. This is why we believe in building a strong digital destination for news and encouraging our most engaged readers to make us a daily habit. We also believe that when it comes to advertising, the world's best companies want the same things as thoughtful readers, digital environments where their brands are safe and they won't find themselves next to dishonest or tawdry content, and where they can associate themselves with journalism of quality and ambition. In the chaotic landscape of digital advertising, we believe that the guarantee of quality that we apply to our journalism is also a guarantee of safety and value for our advertisers.
Let me turn now to the detail of the results, beginning with our digital consumer business. In the quarter, we added 308,000 net digital-only new subscriptions, the largest quarterly addition in the history of our pay model. We've also seen exceptional discount relative to the size of our total subscriber base. As we have experienced a significant increase in net subscription additions over the past three quarters, we expect ARPU to continue to decline before stabilizing when new subscriptions step up to full price. As I said on last quarter's call, predicting the number of net additional digital subscriptions has become increasingly difficult, and we are discontinuing forward guidance on this metric. We will continue to provide customary revenue guidance.
As Mark mentioned, over the course of the last several weeks, we have experienced a slowdown in the rate of net additions to our news product relative to our experience over the past two quarters. While we do not expect second-quarter additions to continue at a similar rate to the last two quarters, we do expect them to grow at a healthy rate relative to last year's second quarter. I'll also remind you that the second quarter is generally a slow quarter for digital subscription growth. We continue to focus on retention of our subscribers. To date, we have seen nothing to suggest that the large number of new subscribers is retaining differently from historical retention levels. In the first quarter, we launched a program that allows individuals to sponsor student subscriptions to our digital news products.
Revenue recognized in the quarter from this program, while small, is reflected in other revenues and does not impact our digital subscription count. Moving on to advertising. We reported our third consecutive quarter of double-digit growth in digital, while challenges in print remain. The growth in digital advertising was driven by programmatic, mobile, and our marketing services business, while our desktop homepage and direct sell products continued to decline. Lower print advertising was mainly due to declines in luxury, technology and telecommunications, financial, and travel categories. On a monthly basis, overall advertising revenue was down 9% in January, 1% in February, and 10% in March. Other revenues grew 21% versus the same quarter in 2016 to $26 million, principally driven by affiliate referral revenue from the product review and recommendation websites The Wirecutter and The Sweethome, which we acquired in the fourth quarter of 2016.
GAAP operating costs increased 4.5% in the quarter, while adjusted operating costs increased 5.5%. We continue to keep a sharp focus on our cost base while investing where necessary to support growth. To that end, our print production and distribution costs were lower in the quarter, while costs grew in marketing as a result of our brand campaign and to drive the increased level of consumer acquisition. Additionally, we experienced cost growth in advertising and as a result of the three companies we acquired in 2016. In the quarter, we recorded one special item, a nearly $2.5 million charge, which has been included from our pro forma results, for the reconfiguration of our headquarters building to make more space available for rental income.
Including this quarter's charge, we expect to incur approximately $10 million in non-capitalizable expense related to this project over the course of 2017, which will be broken out as a special item each quarter. As I said last quarter, we expect to incur approximately $50 million in capital expense related to this project in 2017. We've begun to market the space, and we expect to begin recording rental income in 2018.
Moving to the balance sheet. Our cash and marketable securities balance grew during the quarter and ended the quarter at $753 million, with total debt and capital lease obligations principally related to the sale-leaseback of a headquarters building of approximately $248 million. Now, let me conclude with our outlook for the second quarter of 2017. Total print and digital revenues are expected to increase at a rate similar to the first quarter of 2017, driven by the continued benefit from our digital subscription revenue growth. We also expect digital-only consumer revenue to grow at a rate similar to that of the first quarter of 2017. Overall advertising revenues are currently expected to decrease in the low- to mid-single digits, with growth in digital advertising in the mid-teens.
Other revenues are expected to increase in the mid-teens, largely from the impact of the Wirecutter business we acquired in late 2016. We expect increased costs related to an elevated level of market advertising spend to support digital revenue growth, higher newsroom costs reflecting the active news environment, as well as additional costs associated with the three acquired companies. As such, operating costs and adjusted operating costs are expected to increase in the mid-single digits. With that, we'd be happy to open it up for questions. Thank you.
Thank you, Jim. We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Our first question comes from John Janedis from Jefferies. Please go ahead.
Thank you. I was hoping to dig a little bit more into the composition of the digital subs away from the students piece. Are the demo skewing younger? What impact are you seeing from international? And then more broadly, Mark, you spoke to this, but can you expand a little bit more on why you think the subscriber opportunity has decoupled from the news cycle?
Okay. Well, let me talk briefly, but I'll hand over to Meredith on the kind of demographic shape of new subscribers. We're seeing, I think, a group of people who are, in some respects, similar to the subscribers we already have, but there's some encouraging signs in terms of a broader range. I want to say about international, that the surge we've seen in Q4 and Q1 contained a similar proportion broadly, a bit slightly less in Q4, slightly more in Q1, of international subscribers. I think interest in what's going on in America, and frankly, the other big stories in a pretty complicated and disrupted world, is attracting thoughtful readers outside the U.S., and we're very excited about that. We've done a launch in Australia of an enhanced service for users in Australia this week. We're very encouraged by that.
The point I was trying to make in my remarks was that we were seeing our model. If you go back to 2015 and look at the track through 2015 relative to 2013 and 2014, we could see the things we were doing in adjusting some of the parameters in the pay model, in particular, side doors and so forth, the customer journey through the pay model. Simply through progressively superior execution, in our consumer marketing department, meant we were seeing, we thought, very encouraging numbers, both in terms of higher new starts and also better numbers in terms of retention. Since 2015, we've been learning and improving. We have some, we believe, significant further levers to pull in terms of the pay model.
We believe that the fundamental story from 2015 onwards is a better understanding and better execution of the pay model and an opportunity to accelerate it. I think that, when I look at the next few years, we're certainly not saying that we expect the short-term effects of Donald Trump's election as president and the associated news cycle necessarily to last at its current rate forever. We do think the potential to go on accelerating the model is there, definitely. Do you want to talk a bit more about the new subscribers?
Sure. Hi, John. Psychographically, we have defined our target audience and also our subscribing audience sort of broadly as curious people. Lots of ways we can describe that. Probably the easiest is people who, in their leisure time, want to be learning and want to be engaging and exposed to things that they didn't know previously or are new to them. We're seeing that hold up for the new subscribers. We're tending to draw people who psychographically look similar. Demographically, the new audience is tending to be younger and skewing slightly more female, and that is in part based on work we're doing to target that way, and it is also, I think, based on who's interested in engaging with The Times.
I think one of the most notable things is we're still seeing, we've been seeing this for some time prior to the election, and we're continuing to see it, our single largest cohort of growth on The Times is millennials.
That's helpful. Thanks. Maybe, Meredith, sticking with you maybe on the digital advertising component, given the safety guarantee, in terms of the content, are you seeing any evidence of dollars or budget shifting to your digital properties from some of the larger players?
I'll broadly say that the mood music around brand safety and around a marketer and a news organization or a content company having a direct relationship has intensified, and I think that bodes very well for The New York Times. It's hard to imagine that hasn't played a role in three straight quarters of double-digit increases in digital advertising. Yes, I think it is playing a role. I think it's quite important. I think marketers are becoming much more conscious, not just of their ability to buy audiences efficiently at scale, but also to not always disassociate that from the provider of content that actually convenes that audience. Again, I think that bodes well for us.
Great. Thanks so much for the help.
The next question comes from Kannan Venkateshwar from Barclays Capital. Please go ahead.
Thank you. Just a couple from me. Mark, you mentioned that some of the trends you're seeing right now actually originated last year, even before the elections. When you look at the cohort of the first set of customers post your ramp, how's the retention? I think Jim touched on this a little bit, but how are you seeing the churn rates evolve for the growth over the last year or so versus what you had prior to that?
So-
Sorry, go ahead.
No, please ask your second question.
Secondly, from Jim, your perspective, there's obviously some growth in costs this year. When we look into 2018, is it fair to assume that the fixed cost model that typically has generated operating leverage on the print side of the business, I mean, that kind of a model will start becoming more evident next year, even as digital ramps? Or should we wait for some time before we start expecting those trend lines?
Okay, let me have a go at churn first. We've seen an overall picture of an improvement in churn, which has been pretty consistent now for many quarters. Although it is too early to be certain that that will continue with the very large number of new subscribers that we've had, essentially around a quarter of the whole who've arrived in recent months. I think it's fair to say the early indications about retention in the early months are very encouraging relative to the, as it were, the previous cohorts coming in. These are subscribers, the overwhelming majority who are on introductory offers. We moved to longer introductory offers some time ago, and that, we think, is a significant factor in improved churn numbers because it turns out the longer introductory offers where people get habituated at The Times come to value it, are better at retaining subscribers.
In the early months of the tenure of these new subscribers, the churn rates we're seeing are encouraging, but I also want to give some caution. We've seen a lot of new subscribers arriving. We're going to discover over the course of the next 12 months or so whether their behavior continues to be, as it were, better in churn than previous cohorts or not.
On the cost side, Kannan, I would say a couple things. First of all, I think the first quarter I don't view as kind of indicative of kind of longer term trends in our cost base. I've already kind of isolated some of the cost growth around some of the acquired companies, some of the marketing spend. As we get to the back half of this year, I think you'll see some moderation there. Underneath that, the core kind of cost structure of the business, the fixed cost structure, continues to be tightly managed. At the same time, we're going to have to be adaptable to the change in the market, the changes in our consumer business. We can change our digital business. Hard to say long term other than kind of a commitment to be aggressive on cost.
The real estate project, which we've talked about a lot, will begin bearing some real fruits in 2018. It's a little hard to go long term as a business that's in significant transition, and we'll be adaptable, and we will want to continue to invest where we think we need to.
The only thing I want to add is we said in the last earnings call about Q4 last year that we had a commitment to returning to a growth and adjusted operating profit as a company as soon as we could. I said back then in the beginning of February, I didn't know exactly when that, but we couldn't say exactly when that was going to start. In fact, we just had a quarter, Q1, with a modest increase in adjusted operating profit, and we remain committed to driving revenue and managing costs such that we can get that critical adjusted operating profit measure to grow year-over-year, quarter-over-quarter.
Thank you.
The next question comes from Craig Huber from Huber Research Partners. Please go ahead.
Great. Thank you. A few questions. Jim, maybe I'll start with you. On the cost front, if you take out the small acquisitions, is your core cost up like low single digits? Is that what you're sort of expecting for the full year?
Well, we said, I think mid-single-digit growth in cost in Q2. I haven't gone beyond that, but I'm largely signaling where I think we would see better year-over-year performance. We're going to start lapping through some of the acquisitions in the back half of the year. We think marketing spend in the first quarter is probably more aggressive than we'll see in subsequent quarters. Again, we will have to be adaptable as the market changes. As I sit here today, I think second half performance relative to first half would be more favorable on a year-over-year comp, but still off. We don't cycle through acquisitions until the biggest acquisitions deep into the fourth quarter. There's some one-time events we'll be cycling back after the Olympics and elections last year inflated costs in the back half.
There’s a number of factors, I think, that work in our favor in the second half, but I’d rather not be much more precise in the first than in the second quarter.
On your second quarter outlook for print advertising, I guess, embedded in your guidance sort of appears print down 10%-15% year-over-year. Is that a fair statement?
I think Jim's given the guidance. What I'll say is.
You're going to stick with it.
I'm going to stick with it.
In our digital crossword business, adding 40,000 subscriptions this quarter. Total subscriptions combining digital news and crossword subs with our print home delivery subscriptions stood at 3.2 million at the end of the quarter. We saw some moderation in the rate of new subscription adds to our news product towards the end of the quarter and expect that moderation to continue through Q2. I want to emphasize, though, that our digital subscription business had started to accelerate long before the 2016 presidential election cycle got into its stride. The acceleration was driven by data-driven adjustments to our pay model and greatly improved execution in our consumer marketing department. We have more improvements in the works, and we're confident that even after the intensity of the current news environment subsides, this underlying acceleration will continue. We also saw exceptional growth in digital advertising in Q1 with a 19% year-over-year increase.
Our strategy to pivot the business to focus on smartphone, branded content, innovation and marketing, and creative services is paying off. Print advertising remained tough with a decline of 18% year-over-year in the quarter. It's a testimony to just how far our business has already transitioned towards digital, that this steep decline did not stop us from growing our total revenue significantly in the quarter. When I arrived at the Times four and a half years ago, print advertising was such an important part of the company's economics that the idea of growing total revenue in the face of such stiff headwinds would have been unthinkable. The dynamism of our digital businesses now makes it possible. Costs rose in the quarter, largely because of higher marketing expenses, not all of which will repeat in subsequent quarters, and the inclusion of costs from acquired companies.
Despite this increase in costs, the fact that total revenue for the company grew 5% in the quarter enabled us to grow adjusted operating profits slightly as well. Let me finish with a few words about Times journalism. During the quarter, we launched the brand advertising campaign based on the proposition that the truth is hard. It struck a chord not just in America but around the world, and has been very widely commented upon. Even the President of the United States was kind enough to draw attention to it. The campaign makes the case for the kind of deeply reported, courageous, and serious journalism that The New York Times has always stood for. That journalism is as strong today as it's ever been. In recent weeks, it's been recognized with an astonishing crop of awards, including three more Pulitzers.
We've also seen some exciting new talent arriving in both our newsroom and in our editorial department. Our new Deputy Managing Editor, Rebecca Blumenstein, and new Business Editor, Ellen Pollock, are now working together to reshape how the Times covers business and financial news. T Magazine has a new Editor, Hanya Yanagihara, who will plot the future direction of one of the world's preeminent style magazines. Our Editorial Page Editor, James Bennet, recently brought the Pulitzer Prize-winning columnist, Bret Stephens, to our op-ed pages. We're now in rapid transition from a celebrated past as a great American newspaper to a future of even greater potential as a subscription-first, mobile-first news provider for thought-
seen periods of steep decline in print before that have been followed by periods of moderation, and it remains a business that is quite hard to predict. As Mark said earlier, it is becoming less important to the overall picture than it's been.
Look, I would say broadly, the guidance we gave this morning suggests an improvement in advertising.
A potential overall improvement, yeah.
I would say the mood feels a little better on print, but it's a relative statement. The one thing I would say is, I think you're all aware that the comparisons get easier for us throughout the year. Back half of last year was near -20%. First quarter was down about 10% last year. That's a factor, but it's a pretty tough market right now to predict longer term, but our guidance of low- to mid-single-digit decline would suggest some improvement, but I wouldn't say it's a radical improvement.
Yeah.
Yeah.
I'll say one other thing about print advertising, which is that it still does play a very important role in marketing mix, and in particular categories. There are things that print does for a marketer that haven't yet been replaced wholly by a digital solution, like driving to retail, which is a category under enormous pressure, but there's still value there, and like signifying that a particular thing is important in a moment in time.
We got asked the first question from John Janedis about brand safety. It seems to me that I wouldn't rule out the idea of print feeling like a very secure environment for brands and all the rest of it. I wouldn't rule out the idea that if those concerns continue, I think it's helping our digital business. I think it could also help our print business to a degree.
If you had to rank the reasons why the last 2-3 quarters had a significant increase in the digital subs, where would you rank the anti-Trump movement out there, if you will, and the enthusiasm around the election and all that as helping to drive that number? Is that number one or number two in your minds, or is it the 50% off for the 12 months that you guys have in the marketplace offers the first 12 months? How do you foresee that thing?
I would rank extraordinary news cycle number one, but I would say a close and very important second is that we are just fundamentally getting better at executing on both conversion and retention. As we get better at it, retention is becoming even more focused. On the conversion side, we far, far better understand the customer journey, what experience someone has to have to actually want to subscribe. On the retention side, we're understanding how to onboard people more effectively. That really matters, given that we've just brought in close to 600,000 subscribers in the last six months. We're getting better at identifying what we call customer priority moments.
What are the moments in their relationship with us when it can sort of turn either way, they see more value or they say, "I no longer want to subscribe." We're also getting better at identifying customers who are at risk because they haven't engaged enough and we can add-
Audiences everywhere. One of the things that gives us most confidence as we execute this transition is our access to talent, both the world-class talent we already have and the exceptional talent we can attract into the company, talent like Rebecca, Ellen, Hanya, and Bret, and other new colleagues in every part of the Times. We are fully committed to the investment needed to maintain outstanding frontline reporting. Indeed, as I noted in our last earnings call, we've actually boosted the newsroom budget in some critical areas. My colleague, Dean Baquet, has also made it clear that our newsroom needs to adapt and develop if we're to seize the opportunity in front of us. The recent 2020 report set out some important recommendations for change, including the need to approach the task of editing our news report in a new way.
You can expect to hear more about that and about plans to recruit further new journalistic expertise and talent over the course of the present quarter. In February, we introduced The Daily, a new audio report that's already had more than 27 million downloads and streams and is on track to surpass 100 million in its first year. The Daily is a new way to encounter Times journalism and to get a behind-the-scenes flavor of what Times journalists do. Its freshness of style and the warmth and brilliance of its host, Michael Barbaro, have already made it an unmissable pleasure for its large and growing audience. Whether in audio, virtual and augmented reality, in digital products like our new offering for Snapchat or in ad formats, innovation is helping us to find new users and drive new revenue streams.
Now let me turn it over to Jim for a more detailed financial review.
Thank you, Mark, and good morning, everyone. As Mark said, the first quarter results reflect a solid growth. Adjusted diluted earnings per share was $0.11 in the first quarter, compared to $0.10 in the prior year. We recorded GAAP operating profit of approximately $29 million, compared to an operating profit of $28 million in the same period of 2016. Overall revenues are up 5% in the quarter as strong consumer, both print and digital, as well as digital advertising revenues more than offset continued weakness in print advertising. Total consumer revenues increased by 11% in the quarter, with digital-only subscription revenue continuing to grow strongly, up 40% to $76 million. Both our core news and crossword product revenues grew at this rate in the quarter.
On the print circulation side, revenues were nearly two percentage points higher as home delivery revenues more than offset a decline in revenue from single copy sales. Home delivery revenues increased in the quarter compared to the prior year as home delivery price increase in early 2007 more than offset volume declines. Total daily circulation declined by 4.7% in the quarter compared to the prior year while Sunday circulation was flat. As was the case last quarter, ARPU continued to decline in the first quarter, largely due to the sharp increase in net subscription additions, most of which start on a promotional-
Pinning much more effectively around that to get them to engage. I would say, of course, news cycle is playing a role, but in the background, we are getting much more effective at our own marketing so that when we reach a period where the news cycle is less intense, we feel confident that we can still move the business pretty significantly.
Just to clarify, so you feel you guys are doing a better job marketing, understanding the marketplace out there. It's just almost honestly just a pure coincidence that happened basically right around the election here in the U.S.?
No. What you also
I know it was building for a number of years, but was it
Sure, but what Meredith is saying is we absolutely believe that the extraordinarily intense news cycle has been a very significant factor. Indeed, Meredith said, and I think she's right, it's the single most important factor for the scale of the bump we've seen in recent quarters.
I think the news has become the news in many ways. Certainly, that was the case in part of the fourth and much of the first quarter, and I think that's also changed the mood music in the world around people thinking about the importance of high-quality journalism and potentially changed willingness to pay. That's had an extraordinary impact. All of that said, at the same time, we have gotten, candidly, a lot better at marketing, and we've brought in a lot of talent to help us do that, and we're developing structures and processes to just do that more effectively.
What I tried to say in my remarks is, we think we've got an underlying story of growth potential and acceleration in our model. That's been added to in recent quarters by the extraordinary circumstance of the news cycle and the prominence of "The New York Times" within that news cycle. We think that even when that subsides, the underlying story of potential and acceleration of growth will continue.
If I were to be precise about that, I would say we've gotten much better at using data to understand the behavior of a customer on the journey to subscribe, and then once they've subscribed, on the journey to see more and more value in their relationship with us.
Great. Thank you.
Our next question comes from Alexia Quadrani from JPMorgan. Please go ahead.
Hi, this is Paris Taylor for Alexia Quadrani. Just had a quick question here. Can you guys discuss the current mix between traditional display, programmatic, mobile, and branded content within digital advertising? Are you guys seeing any seasonality within those particular segments in digital advertising?
Sure. Hi there. Good question. In the first quarter, I'll do it in the context of last year at this time. In the first quarter of 2016, what we consider our growth businesses, which are essentially mobile, which is mostly smartphone programmatic, branded content and marketing services, was about 40% of the total digital advertising mix. In the first quarter of this year, it was almost 60%. We've seen a real shift in both demand and in our ability to service those growth businesses. That's been our strategy for almost four years, and we intend to continue tilting in the direction of those businesses.
Okay. Also, just a quick follow-up. What % of mobile is digital advertising? If you guys can...
It was smartphone specifically, I think, 21% in the first quarter, and that's 60%-70% growth over last year.
Okay, excellent. Thank you, guys.
Our next question comes from Doug Arthur from Huber Research Partners. Please go ahead.
Yeah, Meredith, just looking at digital advertising, you mentioned or Jim mentioned that the comps in print get easier in the second half. Clearly, they get more difficult in digital, and I know you're doing more and more project work on the branded side. Any commentary on what digital growth could look like in the second half of the year against tough comps? Then I've got a follow-up.
I will not guide beyond what Jim has already done. What I will say is, yes, I am aware. We had an extraordinary third quarter last year and a very strong and very big fourth quarter. What I'll say is similar to what I just said, we have tilted toward the business really being focused on branded content, marketing services, programmatic and mobile. Just to break that down, three of those things tend to get bought in a different and more ongoing way, which I think bodes well for a more sustainable business. Both branded content, as it relates to individual campaigns and marketing services, tends to be bought in association with big ideas or very big direct partnerships with marketers that are lasting. We talked a lot last year about the lumpiness.
Yeah
... of the business, and that was frankly our getting from the sort of beginnings of being good at that business to a more mature state. As that matures, we have some optimism that we'll see the benefit all year long, not sort of fluctuating as much from quarter to quarter. In programmatic, interestingly, I think this is actually quite important. We have been aggressively trying to move the business from open market programmatic, where if you think of that original LumaScape chart, you've got a marketer on one side, a publisher on the other, and like a thousand intermediaries in between. We are doing everything in our power to cut down the number of intermediaries and to work as directly with marketers as we possibly can so that we're just really doing process automation.
When you get that working well, that is a business that happens on an ongoing basis. You connect the pipes, you figure out who the marketer is targeting, you figure out how to deliver that target on an ongoing basis, and you've got something that can happen month after month after month. All of those things as they mature and we get more sophisticated in our ability to deliver them, become more stable over time.
Yeah. Obviously, we can't, partly because some of the deals are now very large and they are difficult to predict exactly when they're going to land. We can't rule out some lumpiness.
Of course.
to use that British word, in the future. It's really worth saying, we feel very bullish about this business. We think we've got great talent in place. We think we really are finding market is very, very open to the new forms of advertising that we're offering. It's worth saying our digital advertising growth is not significantly correlated with the news cycle or anything else. It's a new business which we've been building, and we feel very confident about our ability to go on growing it.
Well, as a follow-up, is it safe to assume that as you add this fairly massive number of digital subs, and so you're sort of building a new digital ecosystem, clearly of loyal followers, I would assume that that has somewhat of a linear impact on not maybe CPMs, but on digital ad, the attractiveness of your platform for digital advertisers?
Yeah. Well, if I can just say, I think this is a really important point, that having a deeply engaged audience of thoughtful readers who want to spend time on our journalism, the quality of the environment, so the kind of the brand safety point taken together, do give us a really special opportunity. I think that's right. Meredith, you comment on-
Yeah, I'd just add, I would say exactly that. I think the engagement thesis and the idea of taking lightly engaged and moderately engaged users and getting them to engage more deeply with us bears fruit in the consumer business, and it equally bears fruit in the ad business. The deeply engaged users is the strategy, and it works in both businesses, and it feeds both businesses.
Great, thanks.
This concludes our question and answer session. I would like to turn the conference back over to Harlan Toplitzky for any closing remarks.
Thank you for joining us this morning. We look forward to talking to you again next quarter.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Discount relative to the size of our total subscriber base. As we have experienced a significant increase in net subscription additions over the past three quarters, we expect ARPU to continue to decline before stabilizing when new subscriptions step up to full price. As I said on last quarter's call, predicting the number of net digital subscriptions has become increasingly difficult, and we are discontinuing forward guidance on this metric. We will continue to provide customary revenue guidance. As Mark mentioned, over the course of the last several weeks, we have experienced a slowdown in the rate of net additions to our news product relative to our experience over the past two quarters. While we do not expect second quarter additions to continue at a similar rate to the last two quarters, we do expect them to grow at a healthy rate relative to last year's second quarter.
I'll also remind you that the second quarter is generally a slow quarter for digital subscription growth. We continue to focus on retention of our subscribers. To date, we have seen nothing to suggest that the large number of new subscribers is retaining differently from historical retention levels. In the first quarter, we launched a program that allows individuals to sponsor student subscriptions to our digital news products. Revenue recognized in the quarter from this program, while small, is reflected in other revenues and does not impact our digital subscription count. Moving on to advertising, we reported our third consecutive quarter of double-digit growth in digital, while challenges in print remain. The growth in digital advertising was driven by programmatic, mobile, and our marketing services business. While our desktop home page and direct sell products continued to decline.
Lower print advertising was mainly due to declines in luxury, technology and telecommunications, financial, and travel categories. On a monthly basis, overall advertising revenue was down 9% in January, 1% in February, and 10% in March. Other revenues grew 21% versus the same quarter in 2016 to $26 million, principally driven by affiliate referral revenue from the product review and recommendation websites, The Wirecutter and The Sweethome, which we acquired in the fourth quarter of 2016. GAAP operating costs increased 4.5% in the quarter, while adjusted operating costs increased 5.5%. We continue to keep a sharp focus on our cost base while investing where necessary to support growth. To that end, our print production and distribution costs were lower in the quarter, while costs grew in marketing as a result of our brand campaign and to drive the increased level of consumer acquisition.
Additionally, we experienced cost growth in advertising and as a result of the three companies we acquired in 2016. In the quarter, we recorded one special item, a nearly $2.5 million charge, which has been excluded from our pro forma results, for the reconfiguration of our headquarters building to make more space available for rental income. Including this quarter's charge, we expect to incur approximately $10 million in non-capitalizable expense related to this project over the course of 2017, which will be broken out as a special item each quarter.
As I said last quarter, we expect to incur approximately $50 million in capital expense related to this project in 2017. We've begun to market the space, and we expect to begin recording rental income in 2018. Moving to the balance sheet. Our cash and market securities balance grew during the quarter and ended the quarter at $753 million, with total debt and capital lease obligations principally related to the sale leaseback of a headquarters building of approximately $248 million. Now, let me conclude with our outlook for the second quarter of 2017. Total print and digital revenues are expected to increase at a rate similar to the first quarter of 2017, driven by the continued benefit from our digital subscription revenue growth. We also expect digital-only consumer revenue to grow at a rate similar to that of the first quarter of 2017.
Overall advertising revenues are currently expected to decrease in the low- to mid-single-digit %, with growth in digital advertising in the mid-teens %. Other revenues are expected to increase in the mid-teens %, largely from the impact of the Wirecutter business we acquired in late 2016. We expect increased costs related to an elevated level of marketing and advertising spend to support digital revenue growth, higher newsroom costs reflecting the active news environment, as well as additional costs associated with the three acquired companies. As such, operating costs and adjusted operating costs are expected to increase in the mid-single-digit %. With that, we'd be happy to open it up for questions. Thank you.
Thank you, Jim. We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Our first question comes from John Janedis from Jefferies. Please go ahead.
Thank you. I was hoping to dig a little bit more into the composition of the digital subs away from the students piece. Are the demos skewing younger? What impact are you seeing from international? And then more broadly, Mark, you spoke to this, but can you expand a little bit more on why you think the subscriber opportunity has decoupled from the news cycle?
Well, let me talk briefly, but I'll hand over to Meredith on the kind of demographic shape of new subscribers. We're seeing, I think, a group of people who are, in some respects, similar to the subscribers we already have, but there's some encouraging signs in terms of a broader range. I want to say about international, that the surge we've seen in Q4 and Q1 contained a similar proportion broadly, a bit slightly less in Q4, slightly more in Q1 of international subscribers. I think interest in what's going on in America, and frankly, the other big stories in a pretty complicated and disrupted world, is attracting thoughtful readers outside the U.S., and we're very excited about that. We've done a launch in Australia of an enhanced service for users in Australia this week. We're very encouraged by that.
The point I was trying to make in my remarks was that we were seeing our model. If you go back to 2015 and look at the track through 2015 relative to 2013 and 2014, we could see the things we were doing in adjusting some of the parameters in the pay model, in particular, side doors and so forth, the customer journey through the pay model, and simply through progressively superior execution in our consumer marketing department, meant we were seeing, we thought, very encouraging numbers, both in terms of higher new starts and also better numbers in terms of retention. Since 2015, we've been learning and improving. We have some, we believe, significant further levers to pull in terms of the pay model.
We believe that the fundamental story from 2015 onwards is a better understanding and better execution of the pay model, and an opportunity to accelerate it. I think that when I look at the next few years, I think that, we're certainly not saying that we expect the short-term effects of Donald Trump's election as president and the associated news cycle necessarily to last at its current rate forever. We do think the potential to go on accelerating the model is there, definitely. Do you want to talk a bit more about the new subscribers?
Sure. Hi, John. Psychographically, we have defined our target audience and also our subscribing audience sort of broadly as curious people. Lots of ways we can describe that. Probably the easiest is people who, in their leisure time, want to be learning and want to be engaging and exposed to things that they didn't know previously or are new to them. We're seeing that hold up for the new subscribers. We're tending to draw people who psychographically look similar. Demographically, the new audience is tending to be younger and skewing slightly more female, and that is in part based on work we're doing to target that way, and it is also, I think, based on who's interested in engaging with The Times.
I think one of the most notable things is we're still seeing, we've been seeing this for some time prior to the election, and we're continuing to see it, our single largest cohort of growth on the Times is millennials.
That's helpful. Thanks. Maybe, Meredith, sticking with you maybe on the digital advertising component, given the safety guarantee, in terms of the content, are you seeing any evidence of dollars or budget shifting to your digital properties from some of the larger players?
I'll broadly say that the mood music around brand safety and around a marketer and a news organization or a content company having a direct relationship has intensified, and I think that bodes very well for The New York Times. It's hard to imagine that hasn't played a role in three straight quarters of double-digit increases in digital advertising. I would say yes, I think it is playing a role. I think it's quite important. I think marketers are becoming much more conscious, not just of their ability to buy audiences efficiently at scale, but also to not always disassociate that from the provider of content that actually convenes that audience. Again, I think that bodes well for us.
All right. Thanks so much for the help.
The next question comes from Kannan Venkateshwar from Barclays Capital. Please go ahead.
Thank you. Just a couple from me. Mark, you mentioned that some of the trends you're seeing right now actually originated last year, even before the elections. When you look at the cohort of the first set of customers post your ramp, how's the retention? I think Jim touched on this a little bit, but how are you seeing the churn rates evolve for the growth over the last year or so versus what you had prior to that?
So-
Sorry, go ahead.
No, please ask your second question.
Secondly, from Jim, your perspective, there's obviously some growth in costs this year. When we look into 2018, is it fair to assume that the fixed cost model that typically has generated operating leverage on the print side of the business, I mean, that kind of a model will start becoming more evident next year, even as digital ramps, or should we wait for some time before we start expecting those trend lines?
Okay, let me have a go at churn first. We've seen an overall picture of an improvement in churn, which has been pretty consistent now for many quarters. Although it is too early to be certain that will continue with the very large number of new subscribers that we've had, essentially around a quarter of the whole who've arrived in recent months. I think it's fair to say the early indications about retention in the early months are very encouraging relative to the, as it were, the previous cohorts coming in. These are subscribers, the overwhelming majority who are on introductory offers.
We moved to longer introductory offers some time ago, and that is, we think, a significant factor in improved churn numbers because it turns out the longer introductory offers where people get habituated at The Times come to value it are better at retaining subscribers. In the early months of the tenure of these new subscribers, the churn rates we're seeing are encouraging, but I also want to give some caution. We've seen a lot of new subscribers arriving. We're going to discover over the course of the next 12 months or so whether their behavior continues to be, as it were, better in churn than previous cohorts or not.
On the cost side, Kannan, I would say a couple things. First of all, I think the first quarter I don't view as kind of indicative of kind of longer term trends in our cost base. I've already kind of isolated some of the cost growth around some of the acquired companies, some of the marketing spend. As we get to the back half of this year, I think you'll see some moderation there. Underneath that, the core kind of cost structure of the business, the fixed cost structure, continues to be tightly managed. At the same time, we're going to have to be adaptable to the change in the market, the changes in our consumer business, the change in our digital business. Hard to say long term other than kind of a commitment to be aggressive on cost.
The real estate project, which we've talked about a lot, will begin bearing some real fruits in 2018. It's a little hard to go long term as a business that's in significant transition, and we'll be adaptable, and we will want to continue to invest where we think we need to.
The only thing I want to add is we said in the last earnings call about Q4 last year that we had a commitment to returning to a growth in adjusted operating profit as a company as soon as we could. I said back then in the beginning of February, I didn't know when that exactly, but we couldn't say exactly when that was going to start. In fact, we just had a quarter, Q1, with a modest increase in adjusted operating profit, and we remain committed to driving revenue and managing costs such that we can get that critical adjusted operating profit measure to grow year-over-year, quarter-by-quarter.
Thank you.
The next question comes from Craig Huber from Huber Research Partners. Please go ahead.
Great. Thank you. A few questions. Jim, maybe I'll start with you. On the cost front, if you take out the small acquisitions
Is your core cost up like low single digits? Is that what you're sort of expecting for the full year?
Well, we said, I think mid-single digit growth in cost in Q2. I haven't gone beyond that, but I'm largely signaling where I think we would see better year-over-year performance. We're going to start lapping through some of the acquisitions in the back half of the year. We think marketing spend in the first quarter is probably more aggressive than we'll see in subsequent quarters. Again, we will have to be adaptable as the market changes. As I sit here today, I think second half performance relative to first half would be more favorable on a year-over-year comp, but still off. I mean, we don't cycle through acquisitions until the biggest acquisitions deep into the fourth quarter. These are one-time events. We'll be cycling back half the Olympics and elections, last year inflated costs in the back half.
There's a number of factors I think that work in our favor in the second half. I'd rather not be much more precise in the first than the second quarter.
On your second quarter outlook for print advertising, I guess, embedded in your guidance sort of appears print down 10%-15% year-over-year. Is that a fair statement?
I think Jim's given the guidance. What I'll say is.
You're going to stick with it now.
I'm going to stick with it. We've seen periods of steep decline in print before that have been followed by periods of moderation, and it remains a business that is quite hard to predict. As Mark said earlier, it is becoming less important to the overall picture than it's been.
Look, I would say broadly, I mean, the guidance we gave this morning suggests an improvement in advertising.
Yes.
A potential overall improvement. Yeah.
Yeah, I would say the mood feels a little better on print, but it's a relative statement. The one thing I would say is, I think you're all aware that the comparisons we can get easier for us throughout the year, back half of last year was near -20%, first quarter was down about 10% last year. That's a factor, but it's a pretty-
Yeah
It's a pretty tough market right now to predict longer term, but our guidance of kind of low- to mid-single-digit decline would suggest some improvement, but I wouldn't say it's a radical improvement.
Yeah.
Yeah.
I'll say one other thing about print advertising, which is that it still does play a very important role in the marketing mix, and in particular categories. There are things that print does for a marketer that haven't yet been replaced wholly by a digital solution, like driving to retail, which is a category under enormous pressure, but there's still value there. Like signifying that a particular thing is important in a moment in time.
We got to ask the first question from John Janedis about brand safety. It seems to me that I wouldn't rule out the idea of print feeling like a very secure environment for brands and all the rest of it. I wouldn't rule out the idea that if those concerns continue, I think it's helping our digital business. I think it could also help our print business to a degree.
If you had to rank the reasons why the last 2-3 quarters had a significant increase in the digital subs, I mean, where would you rank the anti-Trump movement out there, if you will, and the enthusiasm around the election and all that is helping to drive that number. Is that number one or number two in your mind, or is it the 50% off for 12 months that you guys have in the marketplace offers the first 12 months?
Yeah.
How do you foresee that thing?
I would rank extraordinary news cycle number one, but I would say a close and very important second is that we are just fundamentally getting better at executing on both conversion and retention. As we get better at it, retention is becoming even more a focus. On the conversion side, we understand the customer journey far, far better, what experience someone has to have to actually want to subscribe. On the retention side, we're understanding how to onboard people more effectively. That really matters given that we've just brought in close to 600,000 subscribers in the last six months. We're getting better at identifying what we call customer priority moments.
What are the moments in their relationship with us when it can sort of turn either way, they see more value or they say, "I no longer want to subscribe." We're also getting better at identifying customers who are at risk because they haven't engaged enough. We can action much more effectively around that to get them to engage. I would say, of course, news cycle is playing a role, but in the background, we are getting much more effective at our own marketing so that when we reach a period where the news cycle is less intense, we feel confident that we can still move the business pretty significantly.
Just to clarify, so you feel you guys doing a better job marketing, understanding the marketplace out there. It's just almost honestly just a pure coincidence that happened basically right around the election here in the U.S.?
No.
I mean, I know it was building for a number of years, but was it?
Sure. No, what Meredith's saying is we absolutely believe that the extraordinarily intense news cycle has been a very significant factor, and indeed, Meredith said she's all, and I think she's right, it's the single most important factor for the scale of the bump we've seen in recent quarters.
I think the news has become the news in many ways. Certainly that was the case in part of the fourth and much of the first quarter, and I think that's also changed the mood music in the world around people thinking about the importance of high-quality journalism and potentially changed willingness to pay. That's had an extraordinary impact. All of that said. At the same time, we have gotten, candidly, a lot better at marketing, and we've brought in a lot of talent to help us do that, and we're developing structures and processes to just do that more effectively.
I think what I tried to say in my remarks is, we think we've got an underlying story of growth potential and acceleration in our model. That's been added to in recent quarters by the extraordinary circumstance of the news cycle and the prominence of The New York Times within that news cycle. We think that even when that subsides, the underlying story of potential and acceleration of growth will continue.
If I were to be precise about that, I would say we've gotten much better at using data to understand the behavior of a customer on the journey to subscribe, and then once they've subscribed on the journey to see more and more value in their relationship with us.
Great. Thank you.
Our next question comes from Alexia Quadrani from JP Morgan. Please go ahead.
Hi, this is Paris Taylor in for Alexia Quadrani. Just had a quick question here. Can you guys discuss the current mix between traditional display programmatic, mobile, and branded content within digital advertising? Are you guys seeing any seasonality within those particular segments in digital advertising?
Sure. Hi there. Good question. In the first quarter, I'll do it in the context of last year at this time. In the first quarter of 2016, what we consider our growth businesses, which are essentially mobile, which mostly smartphone programmatic, branded content, and marketing services, was about 40% of the total digital advertising mix. In the first quarter of this year, was almost 60%. We've seen a real shift in both demand and in our ability to service those growth businesses. That's been our strategy for almost 4 years, and we intend to continue tilting in the direction of those businesses.
Okay. Also, just a quick follow-up. What % of mobile is digital advertising? If you guys can...
It was smartphone specifically, I think, 21% in the first quarter, and that's 60, 70% growth over last year.
Okay. Excellent. Thank you, guys.
Our next question comes from Doug Arthur from Huber Research Partners. Please go ahead.
Yeah, Meredith, just looking at digital advertising, you mentioned or Jim mentioned that the comps in print get easier in the second half, clearly. They get more difficult in digital. I know you're doing more and more project work on the branded side. Any commentary on what digital growth could look like in the second half of the year against tough comps? I've got a follow-up.
I will not guide beyond what Jim has already done. What I will say is, yes, I am aware that we had an extraordinary third quarter last year and a very strong and very big fourth quarter. What I'll say is similar to what I just said, we have tilted toward the business really being focused on branded content, marketing services, programmatic, and mobile. Just to break that down, three of those things tend to get bought in a different and more ongoing way, which I think bodes well for a more sustainable business. Both branded content, as it relates to individual campaigns and marketing services, tends to be bought in association with big ideas or very big direct partnerships with marketers that are lasting. We talked a lot last year about the lumpiness.
Yeah
of the business, and that was frankly our getting from the sort of beginnings of being good at that business to a more mature state. As that matures, we have some optimism that we'll see the benefit all year long, not sort of fluctuating as much from quarter to quarter. In programmatic, interestingly, I think this is actually quite important. We have been aggressively trying to move the business from open market programmatic, where if you think of that original LumaScape chart, you've got a marketer on one side, a publisher on the other, and like 1,000 intermediaries in between. We are doing everything in our power to cut down the number of intermediaries and to work as directly with marketers as we possibly can, so that we're just really doing process automation.
When you get that working well, that is a business that happens on an ongoing basis. You connect the pipes, you figure out who the marketer is targeting, you figure out how to deliver that target on an ongoing basis, and you've got something that can happen month after month after month. All of those things as they mature and we get more sophisticated in our ability to deliver them, become more stable over time.
Yeah. Obviously, we can't. I mean, partly because some of the deals are now very large and they are difficult to predict exactly when they're going to land. We can't rule out some lumpiness.
Of course.
to use that British word, in the future. It's really worth saying, we feel very bullish about this business. We think we've got great talent in place. We think we really are finding marketers very open to the new forms of advertising that we're offering. It's worth saying our digital advertising growth is not significantly correlated with the news cycle or anything else. It's a new business which we've been building, and we feel very confident about our ability to go on growing it.
Well, as a follow-up, is it safe to assume that as you add this fairly massive number of digital subs, and so you're sort of building a new digital ecosystem, clearly, of loyal followers? I would assume that that has somewhat of a linear impact on not maybe CPMs, but on digital ad, the attractiveness of your platform for digital advertisers.
Yeah. Well, if I can just say, I think this is a really important point, that having a deeply engaged audience of thoughtful readers who want to spend time on our journalism. The quality of the environment, so the kind of brand safety point taken together do give us a really special opportunity. I think that's right, but Meredith you can follow up.
Yeah, I would just add, I would say exactly that. I think the engagement thesis and the idea of taking lightly engaged and moderately engaged users and getting them to engage more deeply with us bears fruit in the consumer business, and it equally bears fruit in the ad business. The deeply engaged users is the strategy, and it works in both businesses, and it feeds both businesses.
Great. Thanks.
This concludes our question and answer session. I would like to turn the conference back over to Harlan Toplitzky for any closing remarks.
Thank you for joining us this morning. We look forward to talking to you again next quarter.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.