News Corporation
Q2 2021 Earnings Call Transcript

Published: 5 Feb 2021

[Operator:]

Good day, and welcome to the News Corp. 2Q Fiscal 2021 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mike Florin, Senior Vice President and Head of Investor Relations. Please go ahead.

[Mike Florin:]

Thank you very much, Ally. Hello, everyone, and welcome to News Corp.'s Fiscal Second Quarter 2021 Earnings Call. We issued our earnings press release about 30 minutes 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'll open with some prepared remarks, and then we'll be happy to take questions from the investment community.

[Robert Thomson:]

Thank you, Mike. Across this country and around the world in so many places for so many people, these past few months have been characterized by considerable upheaval, with social, political, financial and health-related tribulations and turmoil deeply profoundly affecting many families, economies and communities. I trust that all on this call and your families have been weathering the storm safely and safely. In the midst of this tumult, which has been a severe stress test for individuals and businesses and countries, I am gratified to report that News Corp has navigated the turbulence, and to be candid, significantly very significantly, increased profitability. We noted 3 months ago that the first quarter was particularly robust. And so I am pleased to report that our second quarter results were even more robust. And this burgeoning is a tribute to the efforts and the commitment and the professionalism of all our employees and to the enduring value of the company's culture created by Rupert Murdoch. In fact, the second quarter of fiscal year 2021 was the most profitable quarter since the new News Corp was launched more than 7 years ago, and there were other significant records established. We have the largest profits for Dow Jones since the acquisition of the company in December 2007. While we reported a 77% rise in EBITDA at subscription video services, where at Foxtel, streaming customers hit an historic high, and we also benefited from lower costs. As Digital Real Estate Services, Move accounted for approximately 80% of that segment's EBITDA growth. And history was made when the New York Post reported a profit for the quarter and for the year-to-date. That is the first profit in modern times at the very least, for what was a chronic loss-making masthead founded in 1801 by Alexander Hamilton.

[Susan Panuccio:]

Thank you, Robert. Fiscal 2021 second quarter total revenues were over $2.4 billion, a decline of 3% versus the prior year, while total segment EBITDA was $497 million, up 40% year-over-year, reflecting strong performances across all of our key reportable segments, driven by a combination of improved operating trends and cost reductions. This is the highest quarterly segment EBITDA since the company was formed in 2013. On an adjusted basis, which excludes the impact from acquisitions and divestitures, most notably the sale of News America Marketing in the fourth quarter of fiscal 2020 as well as currency fluctuations and other items disclosed in our release revenues rose 2%, while total segment EBITDA grew 39%. Net income for the quarter was $261 million compared to $103 million in the prior year. For the quarter, we reported diluted earnings per share of $0.39 as compared to $0.14 in the prior year. Adjusted EPS was $0.34 in the quarter compared with $0.18 in the prior year. Turning now to the operating segments. Digital Real Estate Services segment revenues were $339 million, an increase of 15% compared to the prior year, which is more than double the rate in the first quarter, driven by another record quarterly performance for Move. On an adjusted basis, revenues increased 11%. Segment EBITDA rose 20% to $142 million or 19% on an adjusted basis despite higher investment spending, which was in contrast to the first quarter. Results also included $6 million of costs associated with Move's acquisition of Avail and the Elara transaction at REA. Move's operating results accounted for over 75% of segment revenue growth and approximately 80% of segment EBITDA growth this quarter. Move's revenues accelerated to $155 million, a 28% year-over-year increase, with real estate revenues rising 30%. As Robert mentioned, realtor.com traffic reached 80 million average monthly unique users, reflecting an increase of 37% year-over-year with growth in December accelerating to 44%. Monthly average lead volume remained very strong, growing over 30%. Like the first quarter, we saw strong growth in the performance-based referral model, which accounted for approximately 30% of total Move revenues in the quarter, benefiting from the growth in lead volume, higher home prices and real estate transaction closes. Not only did we see an acceleration in the revenue growth of the referral model this quarter compared to the prior quarter but we also saw growth in Connection Plus, our traditional lead generation product, driven by strong customer demand, enabling improved pricing and higher sell through. As our referral revenues are recognized upon transaction closures, only around 20% of the associated revenues from leads generated in this quarter are reflected in the results. This provides a strong pipeline through the balance of the year, assuming continued favorable housing conditions. These results are very encouraging, and we remain focused on expanding our addressable market through the integration of key ancillary services, including our Rocket Mortgage partnership. We've contributed $19 million to the segment EBITDA growth this quarter versus the prior year, driven by the strong top line growth. As we had previously indicated, we are increasing our investment levels in REALTOR, given the rapid performance in lead volume and further expansion into adjacency. Revenues at REA Group rose 6% to $184 million, reflecting a $12 million or 7% benefit from currency fluctuations. COVID-19 restrictions eased during the quarter, including the removal of property inspection restrictions in Melbourne. Residential listings for the quarter rose 10%, including 25% growth in Metro Melbourne and 13% growth in Sydney. A new developer project launches increased 12% on the prior year. REA's results benefited from growth in residential revenues, which was offset by declines in commercial and Asia. It also is worth remembering that as a consequence of COVID, REA did not implement a price increase in July. Please refer to REA's earnings release and their conference call following this call for more detail. Turning to Subscription Video Services segment. Revenues for the quarter were $511 million, up 2% versus the prior year and included a $33 million or 7% positive impact from foreign currency fluctuations. Adjusted revenues were down 5%, an improvement on the Q1 decline of 7%, benefiting from moderating broadcast subscription revenue declines and the expansion of OTT revenues. Foxtel's closing paid subscriber base reached over 3.3 million as of December 31, up 12% year-over-year, with OTT expanding to over 1.3 million paying subscribers, close to double the prior year's number with Kayo reaching 624,000 and Binge at 431,000 paying subscribers. Kayo subscribers declined slightly quarter-over-quarter due to seasonality, but the decline was much less pronounced than last year as the business successfully managed to transition from winter to spring and summer sporting codes, underpinned by the exclusive cricket content. Residential broadcast subscribers declined about 11% to approximately $1.8 million, relatively consistent with last quarter. Commercial subscribers declined 18% year-over-year to 218,000, with the trend improving sequentially, having bottomed out at 86,000 in the fourth quarter of fiscal 2020 as a consequence of the pandemic. Broadcast churn was somewhat elevated at 17.5% versus 16% in the prior year, impacted by a strategy to reduce promotional offers, which resulted in the roll-off of lower ARPU subscribers. The financial benefit is reflected in a 3% increase in ARPU to almost AUD 80. Segment EBITDA improved 77% to $124 million, the continuing cost transformation at Foxtel, desire to rightsize the cost base was the driver of profitability. Total cost declined approximately 10%, including $35 million of lower sports programming rights and production costs, which was primarily driven by savings from renegotiated sports rights partially offset by the $20 million negative impact related to the deferral of these costs from the fourth quarter of fiscal 2020. Expenses also benefited from lower entertainment programming costs and lower overheads. Some of the cost benefits are timing related, which will reverse later in the year, I will touch on these later. Moving on to Dow Jones. Dow Jones delivered its highest revenue quarter since separation in 2013 and its higher segment EBITDA quarter since News Corp's acquisition in 2007. Revenues for the quarter were $446 million, up 4% compared to the prior year, with digital revenues accounting for 70% of total revenues this quarter, up 6 percentage points from the prior year. Circulation revenues rose 8% due to growth in digital circulation revenues, partially offset by lower single copy and amenity print volume still impacted by COVID-19. As Robert mentioned, Dow Jones again achieved record subscriptions in the quarter with average subscriptions to its consumer products for the quarter exceeding $4 million, up 18% from the prior year and off that digital-only subscriptions were over $3 million, up 29% year-over-year. For the Wall Street Journal, there were 3.2 million average subscriptions for the quarter, up nearly 19% from the prior year, with digital-only subscriptions growing 28% to nearly 2.5 million. Revenues from Dow Jones Risk and Compliance grew 21%, which was a faster growth rate than the past 3 quarters. Overall, professional information business revenues rose 4%. Advertising revenues, which accounted for 26% of revenues this quarter declined just 4% to $115 million, a marked improvement from the 17% decline last quarter. As Robert mentioned, we had another record quarter for digital advertising with 29% growth and digital accounting for 58% of advertising revenues for the second quarter. We saw growth in all categories, particularly in technology. Print advertising revenues declined 29% year-over-year, which was an improvement from the 39% decline in the first quarter. Dow Jones segment EBITDA for the quarter rose 43% to $109 million, with margins expanding to over 24% and up almost 7 percentage points versus the prior year. Costs declined almost 5% this quarter due to lower print volumes and other discretionary savings. At Book Publishing, HarperCollins posted 23% revenue growth to $544 million and a 65% segment EBITDA growth to $104 million, marking the best quarterly performance in its history. Revenue growth was strong across all categories with double digit gains. Robert mentioned the depth of the sub list this quarter, which included strong performances from numerous authors, including Rachel Hollis, Rhonda Byrne, Ree Drummond and Joanna Gaines and David Walliams among others. Similar to what we saw in the past 2 quarters, we are continuing to benefit from a strong rebound in e-books with overall digital sales up 15% year-over-year. E-book sales increased 21% year-over-year with gains in all categories, while downloadable audio books increased 10% year-over-year. We have continued to see higher online sales and, in particularly, benefited from strong orders from Amazon and other e-commerce platforms during the holiday season. But perhaps more importantly, we are seeing very strong consumption levels, likely benefiting from stay-at-home measures and a continuous flow of new content. Revenues increased at low double digits across the backlist, notwithstanding, they contributed 55% of sales this quarter, down from 58% last year due to the larger mix of the front list titles. HarperCollins again demonstrated strong operating leverage despite a 16% increase in cost, in part due to royalties and higher production expenses related to the successful top line performance, margins improved by almost 5 percentage points. Turning to News Media. Despite ongoing challenges, we remain focused on rightsizing the cost base and moving towards digital, helped by a moderation in advertising revenue trends. Revenues for the quarter were $573 million, down 29% versus the prior year, of which the impact from the divestment of News America marketing accounted for the majority of the decline. On an adjusted basis, which excludes the impact from the divestment of NAM and Unruly and the other items mentioned in our release, revenues declined 9%, which is an improvement from a 16% decline in the first quarter. The decline also reflects $34 million or 4% negative impact from the closure or transition to digital of certain regional and community newspapers in Australia. Circulation and subscription revenues rose 5%. There's a $9 million or 4% benefit from currency fluctuations, strong digital paid subscriber growth and cover price increases offset lower news stand sales related to COVID-19. Overall, the year-over-year trends in local currency were better in both the U.K. and Australia compared to the first quarter. Circulation revenues accounted for 45% of total segment revenues. And was slightly higher than advertising this quarter as the mix of revenues become more reoccurring and predictable. Advertising revenue fell $231 million or 48% on a reported basis, of which $191 million or 40% was from the sale of News America Marketing, and $28 million or 6% was related to the negative impact from the closure or transition to digital of certain regional community titles in Australia. The remainder of the decline was due to the overall weakness in the print advertising market. On a positive note, the New York Post continued to outperform with advertising revenues up 23%, and as Robert mentioned, digital advertising up 64%. In fact, digital revenues at the New York Post exceeded 50% of total revenues this quarter. And overall, the New York Post had its highest digital revenue since 2013. Segment EBITDA for the quarter was $66 million, flat with the prior year despite the $22 million a onetime benefit in the prior year related to a settlement of certain warranty related claims in the U.K. and the absence of the modest contribution from News America marketing. Adjusted segment EBITDA increased 5%, which included a $5 million positive contribution from the New York Post. I would now like to talk about some things in the upcoming quarter and the second half. Overall, we expect to see some slowdown in the second half results with forecasting remaining particularly challenging given the ongoing global COVID-19 pandemic. At Digital Real Estate Services, as REA noted, National Residential Listings in Australia for January were flat to the prior year. Results will reflect a small loss related to the consolidation of Elara Technologies in the second half. Please refer to REA's press release and earnings call for more detail. At Move, we remain encouraged by the traffic and lead volume trends, which are expected to drive higher revenues in the second half despite the historically low listing volumes across the industry. We expect these higher revenues to fund at least $40 million of additional reinvestments in the second half compared to the prior year in areas such as brand marketing and product development as we focus on gaining market share and expanding into adjacencies. In Subscription Video Services, we have seen broadcast churn continue to increase due to the ongoing focus on ARPU and seasonal trends with the end of winter sports. However, Kayo has remained resilient, and our OTT subscriber growth led by Binge remains strong. We expect EBITDA results in the second half to be more challenged due in part to the lapping of the prior year cost savings. As a reminder, fiscal 2020 fourth quarter results included a $70 million cost benefit due to the deferral of sports rights and production costs related to COVID-19. We now expect full year overall cost declines, given the better-than-expected revenue performance to be more modest than we had initially expected, with a net reduction of less than AUD 100 million. This includes approximately AUD 80 million of higher sports comp in the second half of fiscal 2021, particularly in the fourth quarter compared to the prior year period. At Dow Jones, overall revenue trends remained favorable compared to the prior year, including strong digital advertising growth. As we look to the rest of the year, we continue to expect to reinvest in the business as we focus on driving revenue growth to its digital assets and expect second half expenses to increase modestly compared to the prior year. In addition, third quarter will face a more difficult digital advertising growth comparison. In Book Publishing, overall industry trends remain favorable, we continue to monitor closely the sustainability of recent consumer spending patterns, such as the increasing free time for consumers to read and the increase in the average number of books purchased. The second half comparables will be tougher, particularly in the fourth quarter, given the material outperformance last year and as we lap some of the initial benefits at the outset of COVID-19. At News Media, the ongoing national lockdown in the U.K. and domestic travel restrictions in Australia continue to put pressure on print circulation, especially with daily newsstand and are also creating increased uncertainty on advertising spend across most categories. Cost declines in the second half are expected to moderate from the first half rate as we lap some COVID-19 saving initiatives as well as the divestment of News America Marketing and the closure or digital transition of some of our newspapers in Australia in the fourth quarter. In our other segment, for the second half, we expect at least a $50 million increase in cost, driven by a combination of higher equity comp related to the stock price performance and the absence of the bonus reductions across the senior executive team in the prior year in response to COVID-19 as well as additional costs related to the implementation of the global shared services initiative. With that, let me hand it over to the operator for Q&A.

[Operator:]

And we'll go ahead and take our first question from Alexia Quadrani from JP Morgan.

[Zilu Pan:]

This is Zilu Pan on for Alexia. Digital advertising at Dow Jones continues to outperform some of your peers. And I'm wondering if there's any further color you can give on why you think you are doing relatively quite well on that front. Is there a vertical SKU or specific advertising products driving the outperformance? And then just some Foxtel with better results at the segment due to the streaming products, what indicators or trends are you looking for to determine the next steps for that asset?

[Robert Thomson:]

Well, first of all, Dow Jones. We have a great team at Dow Jones led by Almar Latour and Josh Stinchcomb, our Chief Revenue Officer, he's done a sterling job in developing our digital ad expertise. And that's across wsj.com, MarketWatch, Barron's and beyond. And the increase has been across categories, but also in new categories in custom advertising. And it's clear that if you want not just a safe space, but a space that is brand-enhancing and an audience that's still most influential in the world in well heeled, then Dow Jones has comparative advantages. Just one broader point to bear in mind with the imminent death of the cookie, our vast audience in the U.S., for example, will be particularly valuable and Dow Jones is a significant component in that. When you add together the uniques across our U.S. businesses, and this is not dejobbing, as you can tell from the number, but we have a close to 350 million monthly nicks. So that's in the advertising audience that's important for Dow Jones but for all our properties.

[Susan Panuccio:]

And I think just to add to Robert's comment, we also, under Josh, who leads the sales team at Dow Jones have been very focused over the past 18 months on improving our ad tech capabilities, upskilling the sales force and improving yield management, which we now believe we're starting to see the benefit of in addition to obviously, the audience growth. And just in relation to the second question for Foxtel. When we think about the trends that we're looking at and the next steps for the assets, well, clearly, OTT will be an ongoing focus for us in that business. As well as the stability in broadcast as the team focus on the management of the base subscribers within broadcast. And they are clearly focused on costs as well. They've done a tremendous job in the first half or really over the last10 months since COVID-19 started in taking out the underlying cost of the business, the renegotiation of sports and entertainment contracts, but we'll be particularly looking forward to the growth within the OTT properties.

[Robert Thomson:]

And to complement Susan's comments, so let's consider how the Foxtel narrative has changed to the questions we have been asked a couple of quarters ago whether we would need to put extra capital into Foxtel and then we're asked whether some spec wanted to buy more speculation and speculation. And the truth is that the successful development of the business has given us real options. And our immediate task and the team's task is to keep driving the business to keep striving, we've obviously made a fairly successful migration to streaming up 90% year-on-year. And we obviously have hits with Kayo and Binge, and we obviously have more work ahead. But the path to the future is certainly paid with possibility.

[Operator:]

We'll go ahead and hear from Kane Hannan from Goldman Sachs.

[Kane Hannan:]

Congratulations on the result. Just 2 for me. Firstly, just the Move revenue outlook. You're talking about $40 million back to the incremental investment. You're seeing strong traffic growth. You won't have the agent concessions in the fourth quarter. Do you think it's possible that, that revenue growth continues to accelerate in the second half? Or just how should we think about the revenue trends? And then secondly, just on the global shared services initiative, I think it was the $100 million bucket you were talking about at the full year result. Just given some of these increasing investment you're talking to in the second half, just interested how we should be thinking about that program in FY '22 and whether there's any change to those sorts of targets?

[Susan Panuccio:]

Thanks. Kane, I might take those questions, and Robert can add and supplement as he will. So just in relation to the sustainability of Move growth, I mean, we remain very confident in the growth of the business and are encouraged by the traffic and the lead volumes, as we talked about in our prepared remarks, notwithstanding the industry listing volumes remain at historically low levels. We do expect with the revenue growth, the cost will increase. And I think the interesting thing to note, when we think about the results for this quarter versus the first quarter, actually, the cost increased this quarter. And so it was really top line revenue growth that was dropping down to the bottom line. So we do think that the revenue growth will continue, and we do want to scale up those costs in the reinvestment areas that I mentioned, marketing and product development. Just in relation to shared services, yes, we did quote $100 million for financial year '22. We're still holding that number at this stage, notwithstanding the cost work that we've done across the business. We do still think that there are enormous opportunities, but it will require, obviously, a lot of work and reconfiguration of our systems in order to unlock those savings. But at this stage, the guidance is still $100 million for financial year '22.

[Robert Thomson:]

And just to supplement, Susan, particularly on Move, clearly, we have to be somewhat cautious in the second half of the year simply because of the complications of COVID. There's a lack of visibility for many of our businesses. And you can see that reflected in our words today. We are certainly taking nothing for granted despite the excellence of the Q2 results. But at Move, the signs are positive, at least in January, and David and the team at REALTOR. With January normally a slower month, unique users rose 37% to $94 million, and the lead volume remained robust. Those are indicators, but we are taking nothing for granted.

[Operator:]

Next we'll hear from Entcho Raykovski from Credit Suisse.

[Entcho Raykovski:]

Robert, Susan, I've got a couple. Firstly, within News Media, obviously, significant cost reductions in the quarter. Just interested in whether you can make any comments about the extent to which those cost reductions are permanent. You obviously indicated that print circulation may be challenged in future quarters. So I don't know if that just results in lower print costs, which may come back down the track. And whether you, in fact, see further opportunities for cost reductions within that division. And then second question is around SVS. Following the announcement of the Telstra live pass users transitioning to Kayo, do you have a sense for how many of -- how many of those circa 3 million users do you expect to transition? And do you have any projections you're willing to share around how many of those you'd expect to hold on to after that promotional period is over?

[Susan Panuccio:]

Entcho, maybe if I start with your first question just in relation to News Media. Obviously, there's been a lot of cost work that's been done. And you're right. Some of that is obviously volume related, and some of that will scale up and down depending on how those businesses trade in light of COVID. But there are also significant permanent cost reductions that the teams have been working on. We've had significant reduction in head count that came through in the back end of last fiscal year that is obviously flowing through here. But we do have a lot of costs that have come out in the overhead space as well. Now some of that naturally will come back in as the businesses open up, but we would also hope that some of that may be permanent as we change the way that we work going forward. We also had in the back end of last year significant reduction in marketing expenditure within News Media, we would expect to see some of that start to come back in, but not necessarily the levels that we're seeing. So I think a balance of both as we look forward. And I do think actually that there are still permanent cost reduction opportunities that the businesses are working on within that segment. A lot of that has to do with the restructuring of the business and the reconfiguration, and the teams are actively working on that.

[Robert Thomson:]

And as for the transition from Live Pass to Kayo, this is obviously an extraordinary opportunity for Foxtel. And our partners at Telstra will be doing everything as they can to encourage their users to make that migration around a total of 3.2 million Live Pass members. For those who are interested in Aussie Rules or rugby or any of the many sports on Kayo, this is an extraordinary opportunity to be able to watch a world-class streaming operation at work. And the -- those who've used Kayo and have experienced its ability to not only show 1 game, but many games simultaneously. That experience is definitely compelling. And so we believe that a very large number of Live Pass subscribers will make that migration, but it's so early in the process that at the moment, we don't want to put numbers out there. But with the imminent start of the winter sports season in Australia, I think you are going to see the metrics in coming months, and we'll be able to update you next quarter.

[Susan Panuccio:]

And I think, Entcho, the only other thing to add to that would be that as we think about this exciting opportunity that Foxtel now have, it will scale clearly more from year 1 given the introductory office. So whilst we would expect subscriber numbers to pick up, we'd expect the actual impact on revenue and EBITDA to be more back-ended from year 1 onwards.

[Entcho Raykovski:]

Got it. That's very useful. Maybe just a very quick follow-up. Do you know if there's much overlap at the moment between the existing Kayo subspace and the Live Pass users?

[Robert Thomson:]

It's relatively small, Entcho. Well below 20%.

[Operator:]

We'll now hear from Craig Huber from Huber Research Partners.

[Craig Huber:]

Susan, I wanted to hear a little bit further about the costs within your subscription video services, just the remaining part of the year and maybe as we think out to the next fiscal year, anything out of the ordinary there you want to call out further you haven't already touched on?

[Susan Panuccio:]

I guess probably the easiest way to maybe frame the cost in the second half is I expect them to be broadly in line with the cost for the first half, which is net of any of the movements that we've obviously talked about with the deferral of sports rights. With the remainder, we are reminded that the full year cost will absorb approximately AUD 156 million of additional cost year-on-year due to the deferrals of those sports cost. So I think the underlying cost work that, as I said, the Foxtel team has done is starting to pay dividends, but clearly, we've got this double off of sports rights in the current year. But as a frame, I would say, broadly speaking, in line with the first half.

[Craig Huber:]

And my follow-on question, if I quickly ask, as you think out to the next fiscal year, is there any large sports programming contracts up for renewal that might have a significant jump if taken into account in our models, the next fiscal year?

[Susan Panuccio:]

No. We've got -- we've obviously just executed the renewals of the AFL and NRL. So we have those deferred up now 2024 and 2027, and we're not expecting in next financial year significant step-up from an overall basis on sports cost.

[Operator:]

It appears we have no further questions. That does conclude our question-and-answer session for today. I would now like to turn over to our speakers for any additional or closing remarks.

[Mike Florin:]

Well, thank you very much, Ally, and thank you all for participating. We look forward to talking to you soon. Have a great day, and stay safe. Take care.

[Operator:]

And with that, that does conclude today's call. Thank you for your participation. You may now disconnect.