News Corp

NASDAQ:NWSA

Earnings Call Transcript 2018-Q2

[Operator]

Good day, and welcome to News Corp 2Q FY 2018 Earnings Conference Call. Today's call is being recorded. Media is invited on a listen-only basis. At this time, I'd like to turn the conference over to Mike Florin, Senior Vice President and Head of Investor Relations. Please go ahead, sir.

[Michael Florin, executive]

Thank you very much, Justin. Hello, everyone, and welcome to News Corp's Fiscal Second Quarter 2018 Earnings Call. We issued our earnings press release about 1 hour ago, and it's now posted on our website at newscorp.com. On the call today are Robert Thomson, Chief Executive; and Susan Panuccio, Chief Financial Officer. We will open with some prepared remarks, and then we'll be happy to take questions from the investment community.

This call may include certain forward-looking information with respect to News Corp's business and strategy. Actual results could differ materially from what is said. News Corp's Form 10-K and Form 10-Q filings identify risks and uncertainties that could cause actual results to differ and contain cautionary statements regarding forward-looking information. Additionally, this call will include certain non-GAAP financial measurements such as total segment EBITDA, adjusted segment EBITDA and adjusted EPS. The definitions and GAAP to non-GAAP reconciliations of such measures can be found in our earnings release.

With that, I will pass it over to Robert Thomson for some opening comments.

[Robert Thomson, executive]

Thank you, Mike. The robust results for the first half of this fiscal year highlight the virtue of our strategy to become increasingly digital and global, the discipline of our financial management and our commitment to premium content and to high-quality, high-integrity news.

Second quarter revenues grew 3% to $2.2 billion and reported total segment EBITDA was up 1% to $329 million. First half revenues were up 4% and reported segment EBITDA rose 27%.

Clearly, there are profound changes taking place in the creation and the distribution of digital content. The big tech disruptors are in the midst of a particularly disruptive period commercially, socially and politically. We appreciate that Google has ended the prejudicial First Click Free and that Facebook is prioritizing provenance, but these are modest steps towards changing a digital environment that is dysfunctional and sometimes dystopian. With the support of Rupert and Lachlan Murdoch and the clear backing of the News Corp board, our company has long been the strongest international advocate of necessary changes to this mephitic landscape.

It is certainly in the interests of our shareholders that there be a digital reorientation towards quality and integrity and that more people are encouraged to pay for professional journalism. There is a social and commercial value to journalism, but that value needs to be valued by the digital publishing platforms. The bot-infested badlands are hardly a safe space for advertisers, whose brands are being tarnished by association with the extreme, the violent and the repulsive.

Now let's get into the details of this quarter's results. I'll start with Digital Real Estate Services, which once again reported a strong quarter with 21% revenue growth and 25% EBITDA growth, solidifying its role as a significant engine of expansion at News Corp.

At Move, home of realtor.com, revenues rose by 18% and core real estate revenues expanded by a healthy 22%. Realtors Connections for buyers' products continues to thrive, with accelerated traffic growth as well as a continued boost in customer and lead volume in the second quarter. There is an ongoing drive to increase the profile of realtor.com as we have the highest consumer engagement and highest ROI for agents and brokers based on our latest [ records ].

We're also making a concerted push in the New York market with an emphasis on having the most extensive listings and always enlightening editorial. The realtor.com road map includes enhancements to our software and services products, which we believe provide best-in-class leads for brokers and the most comprehensive suite of essential tools. Realtor.com will also continue to focus on driving engagement with My Home, which extends usage beyond search and discovery and allows owners to claim their home online and provides data that will be the basis of added value adjacencies.

REA maintains a healthy lead over its stumbling competitor in Australia's digital real estate market with 24% revenue growth year-over-year. Since the launch of home loans, which is part of the company's broader expansion into financial services, REA had over 150,000 self-completed financial profiles by the end of January. Traffic continued to expand this quarter with REA maintaining a sizable lead over the #2 player in the market.

We saw yet another strong quarter in Book Publishing with solid EBITDA growth at HarperCollins. There were vigorous sales from our children's backlist and for Bad Dad by the multitalented David Walliams in the U.K. Meanwhile, the success of Ree Drummond's Pioneer Woman Cooks recipe book was yet another indicator of the power of America's [ higher-planned ] audience.

We're excited by the early success of A.J. Finn's debut novel, The Woman in the Window, which came out in January, and the ongoing success of The Subtle Art of Not Giving a (expletive). We continue to look for ways to leverage our unique titles and creativity. As announced during this past quarter, Amazon plans to license The Lord of the Rings rights for the creation of an original television series, underscoring the great value of our backlist. As J.R.R. Tolkien himself wrote, "Still round the corner there may wait a new road or secret gate."

The performance of the News and Information Services segment was relatively stable, with notable improvements in profit contribution from the U.K. and Australia. At Dow Jones, circulation revenue growth remained robust with a 10% increase year-over-year. We are nearing the short-term goal of 3 million total subscribers, with 2.8 million subscribers to Dow Jones consumer products in the quarter.

The Wall Street Journal experienced an approximate 12% increase in circulation revenues year-over-year. Meanwhile, our Professional Information business is muscular, powered by risk and compliance, which grew over 40% this quarter. Companies simply must invest in reducing risk and enhancing compliance, and Dow Jones has the necessary tools in both of these imperative areas.

At the New York Post, digital ad growth was a robust 35% and represented 60% of total ad revenues for the quarter. This quarter, we launched News IQ, our premium digital advertising platform, which has authenticated audiences and the highest-quality journalism and content in the U.S. There is keen interest in leveraging our first-party data and brand-enhancing environments, which are in stark contrast to the tainted placements on so many digital platforms.

The power of News IQ also comes from concentrated collaboration across many of our business units, which will intensify as we drive our advertising business in the U.S. and pursue longer-term plans of global expansion.

At News UK, we saw modest ad growth for the first time since 2011, driven by emerging digital ad revenue growth at The Sun where there were over 90 million global average monthly uniques in the second quarter. Importantly, we continue to see improved engagement in the U.K. audience, highlighted by higher page views and minutes per session, according to comScore data.

The increasingly popular Sun Savers program, which grew to more than 490,000 registrations as of this week, is expected to generate higher levels of engagement. It is also allowing us to gather permissioned data on readers, traditionally difficult for a paper with strong newsstand sales. Meanwhile, The Times and Sunday Times continue to gain market share, and digital subscribers grew 20% versus the prior year.

At Wireless Group, we saw improvement in revenues at its stations -- as its stations extended their reach and listening hours. Wireless is now home to 2 of the U.K.'s fastest growing stations, led by Virgin Radio, which grew its reach by over 60% year-over-year based on the latest independent data and talkSPORT 2, up about 40% in reach during the same period.

It is worth noting that Unruly had its best quarter ever in terms of total revenue, led by particularly buoyant growth in the U.S. As announced last week, the astute and acute Norm Johnson is assuming the CEO role at Unruly, and co-Founder Sarah Wood will become chair of the Unruly board and continue to exercise a positive influence.

News Corp Australia remained the largest print and digital publisher with an audience of approximately 16 million per month. We saw an acceleration in digital advertising revenue growth, reflecting several changes in the sales structure that better aligned our teams with the evolving need of advertisers. And we remain focused on cost management initiatives to improve operating efficiency, resulting in higher contribution to profitability.

Susan, who has just returned from Australia, will shortly elaborate on these positive developments. The Australian continued to grow digital subscribers, crossing the 100,000 mark for the first time. Significantly more than 50% of its paid weekday volume is now digital.

On the proposed combination of Foxtel and Fox Sports, we received both ACCC and FIRB approvals and are in the process of finalizing what is a complex arrangement with Telstra. That focus has given us an opportunity to begin the reshaping of the 2 companies, and the first step was the appointment of a new Foxtel CEO, the excellent Patrick Delaney. We would like to thank his predecessor, Peter Tonagh, for his sterling contribution during a transitional period and to News Corp over many years.

Once again, this strong quarter showcased the benefits of News Corp's digital strategy, the value of being disciplined on cost and the efficacy of ever-increasing cooperation among our companies.

Before I turn the platform over to Susan to expand on our results, one final word about taxes. Passage of tax reform in the United States should be beneficial to our company and our people, our investors and our customers. At the founding of the new News, we had strong confidence in the potential for U.S. growth. We have invested significantly in U.S. digital real estate and U.S. Book Publishing, for example, and expect to reap even greater rewards, thanks to the tax reform program, which will make the country a better place to do business and creates more opportunities for all Americans. And now over to Susan.

[Susan Panuccio, executive]

Thank you, Robert. Turning to the financials. We delivered another quarter of strong operating results. Fiscal 2018 second quarter total revenues were around $2.2 billion, an increase of $64 million or 3% compared to the prior year, led by our Digital Real Estate Services segment. Reported total segment EBITDA was $329 million, up from $325 million in the prior year.

For the quarter, earnings per share were a loss of $0.14 compared to a loss of $0.50 in the prior year. This quarter's results include a charge related to the remission of deferred tax asset due to the lowering of the U.S. corporate tax rate. I'll discuss in a few moments the expected impact from the U.S. tax reform going forward.

You may recall the prior year period included a pretax noncash impairment charge of $310 million related to The Australian publishing division fixed assets and a $227 million pretax noncash write-down related to the adjustment of the carrying value of the company's investment in Foxtel. Adjusted earnings per share, which excludes both items and the other items shown in the press release reconciliation table, were $0.24 compared to $0.19 in the prior year.

Turning now to the individual operating segments. In News and Information Services, revenues for the quarter were $1.3 billion, relatively flat with the prior year. The acquisition of Australian Regional Media or ARM and foreign exchange contributed $30 million and $33 million, respectively, this quarter.

Within segment revenues, advertising was down 6% and circulation and subscription revenues increased 6%. Within our core news businesses, Dow Jones revenues rose 1%, News UK grew by 7% and News Australia grew by 4%. These increases were offset by a 16% decline at News America Marketing as we flagged during the last earnings call. More revenue details will be provided in the 10-Q filing tomorrow.

Segment EBITDA this quarter was $140 million, down $2 million versus the prior year as year-over-year improvements at News UK and News Australia were more than offset by weaknesses at News America Marketing and higher marketing costs at Dow Jones.

A few highlights to mention from the segment. We saw digital subscription growth across our News businesses. At Dow Jones, circulation revenues grew 10%, the third consecutive quarter of double-digit growth, benefiting from 29 percentage points growth in WSJ digital-only subscribers and higher subscription ARPU. Digital now accounts for over 50% of Dow Jones circulation revenue. We also saw strong digital subscriber growth at The Times and The Sunday Times, up 20% from Q2 2017 and at News Australia up 26%, including a contribution from ARM.

At Dow Jones, we are also building on the renewed momentum at our Professional Information business, which posted 8 percentage points revenue growth, thanks to the continued strong performance from risk and compliance as Robert mentioned. We posted the highest revenue levels since the fourth quarter of fiscal 2014.

Advertising continues to be mixed across the respective divisions. Within the businesses, we saw advertising growth in the U.K. of 9% or 2% in local currency, the first increase in 27 quarters, driven by digital advertising growth from The Sun with a global audience that reached over 90 million monthly unique users in the second quarter as well as moderating print advertising decline.

While at News Australia, advertising revenues improved 3 percentage points but still had an overall decline of 10% versus the prior year after excluding the impact of currency and acquisitions and divestitures, which was consistent with the previous quarter. And at Dow Jones, advertising was down mid-teens, a slight acceleration on the trend from the first quarter.

The closure of The Wall Street Journal international print edition impacted Dow Jones advertising revenues by $6 million or 4 percentage points for the quarter. International expansion continues to be a strategic focus for Dow Jones. And despite the print closure, our total Wall Street Journal international subscriber base still grew 28% versus the prior year.

We continue to push very hard on our cost transformation program, notably in Australia with savings expected to be well ahead of the AUD 40 million realized last year. The program extends across every area from overheads to advertising sales consolidation to newsprint and production and photography. This quarter, as Robert mentioned, News Australia's profitability improved and increased its contribution to segment EBITDA.

With the integration of ARM, we continue to actively look at optimizing the broader Australian portfolio with a focus on profitable growth. We had a similar story in the U.K. which also drove higher profitability this quarter.

Finally, at News America Marketing, revenues were impacted by ongoing weakness in free standing insert revenues, which had 2 fewer inserts versus the prior year and lower custom publishing as well as slightly lower revenues from in-store products, impacted by fewer new consumer product launches this year. Part of the decline was timing-related, and we should see a sequential improvement this coming quarter.

Turning to our Book Publishing segment. We posted a solid quarter despite facing a difficult prior year comparable quarter. Revenues for the quarter increased approximately 1% to $469 million and segment EBITDA increased 7% to $80 million.

Titles to highlight this quarter included Bad Dad by David Walliams in the U.K. and Pioneer Woman Cooks: Come and Get It! by Ree Drummond as well as strong performances from the children's backlist, including The Hate U Give by Angie Thomas and a few titles from Shel Silverstein, including The Giving Tree.

Christian Publishing revenues were lower than the prior year due to the absence of sales from the release of The Magnolia Story, which was amongst our most successful titles last year. Prior year revenues also benefited from Settle for More and Hillbilly Elegy.

Overall, the backlist contributed approximately 53% of revenues in the quarter, up from 49% last year. Total digital revenues for the quarter grew 2% and represented 16% of consumer revenue, in line with the prior year due to the strength in downloadable audiobooks.

In the Digital Real Estate Services segment, revenues increased 21% to $292 million. Reported segment EBITDA was $119 million versus $95 million last year, up 25%.

REA Group revenues grew 24% due to very strong residential debt revenue growth in Australia, including higher penetration for Premiere All, the integration of the Smartline acquisition and modest benefit from currency. In Australia, while total residential listings were marginally lower, listings grew in the key markets of Melbourne and Sydney. The results were also impacted by the sale of the European business last year. Please refer to REA's earnings release in their conference call, which will commence shortly after this call for additional details.

Move revenues rose 18% to $110 million versus the prior year, driven by a very strong performance from connection suppliers, which is benefiting from strong lead growth -- from strong growth in lead volume as well as improving pricing optimization and inventory management. The prior year included $2 million related to TigerLead, which was divested in November 2016. Average monthly unique users at realtor.com were over 50 million for the quarter, rising mid-teens compared to the prior year.

In Cable Network Programming, revenues increased $16 million or 15% to $120 million compared to the prior year quarter, driven by the inclusion of Sky News, which added approximately $8 million to revenues and higher affiliate fees from Foxtel. Segment EBITDA in the quarter fell to $33 million from $51 million, primarily due to the phasing of programming amortization related to the NRL contract, which led to approximately $22 million of higher costs this quarter. We also incurred approximately $2 million related to the proposed combination of Foxtel-Fox Sports, which was excluded from adjusted EBITDA.

With respect to equity losses from affiliates, equity losses were $18 million this quarter compared to losses of $238 million last year, which included the write-down related to the adjustment of the carrying value of the company's investment in Foxtel.

Foxtel revenues for the second quarter declined 1% to $598 million and EBITDA decreased 19% due to planned increases in sports programming costs of $23 million, primarily related to The Australian football league rights, partially offset by lower sales and marketing costs. On operating metrics, Foxtel's total closing subscribers were approximately 2.8 million as of December 31, 2017, which was lower than the prior year, primarily due to the shutdown of Presto.

In the second quarter, cable and satellite churn was 14.5%, down from 15.6% and broadcast ARPU was down 2%.

Regarding the pending transaction with Fox Sports, we were pleased with The Australian Competition and Consumer Commission's and The Foreign Investment Review Board's decisions to approve the combination of Foxtel and Fox Sports into a new company. As Robert has mentioned, commercial negotiations with Telstra are ongoing, and the transaction remains on track to close, subject to board approval in the first half of calendar 2018.

On the impact for the company from the recently approved U.S. tax reform package, I would like to make a few points. The $174 million charge in this quarter primarily reflects the remeasurement of our U.S. deferred tax assets and liabilities at the lower statutory federal rate of 21% from 35%.

As we are on a June 30th fiscal year-end, the impact of the lower corporate tax rate will be phased in, resulting in a U.S. statutory federal tax rate of approximately 28% for the fiscal year ending June 30, 2018, and a 21% U.S. statutory federal rate for fiscal years thereafter. Our effective tax rate should be modestly higher, given our significant business operations in Australia where the corporate tax rate remains at 30%.

Looking forward to the third quarter, there are a few comments I would like to make. At News and Information Services, at this point, advertising trends appear broadly in line with the second quarter, but visibility remains limited. At Fox Sports Australia, we expect to face higher costs in the third quarter due to the amortization of NRL rights throughout the year, similar to the impact in the second quarter. We expect approximately AUD 30 million in higher costs for the third quarter compared to the prior year, with the full year costs expected to increase by AUD 30 million to AUD 40 million as previously mentioned.

In Book Publishing, overall trends remain favorable. As Robert mentioned, we're very excited about A.J. Finn's The Woman in The Window, which is off to a great start. This quarter, we also have the release of Amy Krouse Rosenthal and her daughter, Paris Rosenthal's Dear Girl, another bestseller in its early weeks.

At Digital Real Estate Services, we expect continued strong revenue growth at REA, including incremental revenues from the expansion into the mortgage brokerage business. However, as noted in its ASX announcement, REA expects to see higher cost growth in the third quarter, and listings will be impacted by the timing of Easter, which will fall in the third quarter.

We also expect to see higher investment spending at Move to support new products and to drive higher engagement. With that, let me hand it over to the operator for Q&A.

[Operator]

[Operator Instructions] Our first question today comes from Entcho Raykovski with Deutsche Bank.

[Entcho Raykovski, analyst]

My question is around Foxtel and Fox Sports. And I just wanted to get your perspective on the combined entities appetite to bid for cricket rights in Australia, given they're coming up for tender very shortly. And is there any change in strategy for the entity under Patrick Delaney as CEO which, Robert, you've obviously spoken about?

[Robert Thomson, executive]

Entcho, Thanks. For those of you who are not familiar with sport in Australia, cricket is, for many people, an interesting game. It's complicated. It has various forms, the 5-day tests, 1 days, Big Bash, 20-over games. And clearly, it's a part of The Australian summer and Australian viewing in the summer that we're interested in, but it will be fascinating over coming weeks to track the negotiations for cricket rights, but it's pretty fair to say that we aren't going to pay ridiculous prices for any rights anywhere in the world. But what we do have for any sport is the best possible platform for engagement, both through broadcast and digital. And also, we have, as you just mentioned, Patrick Delaney, who has a background in Foxtel, did a marvelous job at Fox Sports, and is now overseeing Foxtel, and he'll be very much involved in guiding us on what's the appropriate course of action with cricket and, no doubt, focusing in particular on the upcoming selling season for the winter sports, which is the most crucial sales period for us and Foxtel and, frankly, Fox Sports in the year because we have, in the autumn, the launch of the IFL season Aussie rules and NRL, which is Rugby League, the 2 most watched sports in Australia.

[Operator]

That question will come from Craig Huber with Huber Research Partners.

[Craig Huber, analyst]

Just what's the updated thoughts of you whether -- you have upwards of $2 billion of cash on your balance sheet. Just investors are always wondering what the plan is for that, please.

[Susan Panuccio, executive]

Craig, Susan here. I think it's a good question, and we've talked about this before. We continue to remain focused on investment with that cash, and we would continue to look at opportunities that may arise. But we do remain flexible to having a look at any option that retains value for our shareholders.

[Operator]

That question will come from Brian Han with Morningstar.

[Brian Han, analyst]

In the News and Information segment, how much in cost reduction was banked in the second quarter results? And also, how [ thick ] do you think the world is there before it starts to impact on your product quality?

[Susan Panuccio, executive]

So I think the actual -- when you look at the numbers, it looks like the costs are relatively flat, but if you exclude M&A and currency, the costs are actually down 5% quarter-on-quarter, year-on-year. So I think we remain very pleased with the cost reduction work that those businesses are doing, particularly in Australia and across the U.K. As far as focusing on whether it impacts on our product, we continue to look at back office, overheads, corporate functions. We look at platform consolidation, production and manufacturing, which we constantly can continue to find cost savings with as the business is rationalized. So I think we remain very comfortable that we're getting the balance right between cost reduction and reinvestment in our digital properties and, in fact, our print properties going forward.

[Operator]

[Operator Instructions] Our next question will come from Eric Katz with Wells Fargo.

[Eric Katz, analyst]

You guys are seeing some nice growth in circulation and subscription revenue. But how should we think about the impact on advertising as more people migrate to digital? I assume that there's a different sort of economics around digital advertising versus print. So any color would be helpful there.

[Robert Thomson, executive]

Well, we're still in the midst of obviously a transition from print. Print, which remains a strong platform, and we're seeing that with a new real estate magazine that we're launching in coming months, which is oversubscribed by advertisers. So don't discount print. But the digital market itself really is in the midst of our people where you have both advertisers and ad agencies reviewing their role in the market. A great deal of concern about the sort of environments in which famous prestigious advertisers find themselves. And I think what we are gradually going to see, and I think we have little doubt about this, is that there will be a migration to premium, and that's where we have a comparative advantage because titles around the world are the leading titles in their markets. And to supplement that, we are creating News IQ, which is our own in-house-based advertising platform, taking advantage of the great inventory we have and the authenticated audiences we have and being able to offer advertisers an opportunity to project their image and their wares in a space that won't be detrimental to their image but brand enhancing.

[Operator]

That does conclude the question-and-answer session. I'll now turn the conference back over to you for any additional or closing remarks.

[Michael Florin, executive]

Great. Thank you, Justin, and thank you for all participating. Have a great day.

[Operator]

Well, thank you. That does conclude today's conference. We do thank you for your participation today.