News Corporation
Q3 2015 Earnings Call Transcript

Published: 6 May 2015

[Operator:]

Good day, and welcome to the News Corporation Third Quarter Fiscal Year 2015 Earnings Conference Call. Today's conference is being recorded and media is allowed to attend in a listen-only function. 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.

[Michael Florin:]

Thank you very much, operator. Hello, everyone, and welcome to News Corp's Fiscal Third Quarter 2015 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 Bedi Singh, Chief Financial Officer. We'll 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-Q for the 3 months ended March 31, 2015, identifies risks and uncertainties that could cause actual results to differ and these statements are qualified by the cautionary statements contained in such filings. Additionally, this call will include certain non-GAAP financial measurements. The definition of and reconciliation of such measures can be found in our earnings release and our 10-Q filing. Finally, please note that certain financial measures used in this call, such as segment EBITDA, adjusted segment EBITDA and adjusted EPS, are expressed on a non-GAAP basis. The GAAP to non-GAAP reconciliation of these non-GAAP measures is included in our earnings release. With that, I will pass it over to Robert Thomson for some opening comments.

[Robert J. Thomson:]

Thank you, Mike. News Corp is well set on its trajectory for digital and global growth. While we faced headwinds this quarter with particularly blustery currency conditions, we remain on course for the goals articulated when the new News was christened almost 2 years ago. The company has remained true to its proud traditions and now has a firm foundation for the future. In the third quarter of fiscal year 2015, revenues were $2.1 billion and EBITDA was $163 million. Excluding currency fluctuations during this volatile period and certain other costs, our adjusted EBITDA was relatively stable. Bedi will provide greater granularity, but there are a few developments worthy of accentuation. The integration of Move, Inc., acquired late last year, is ahead of schedule, with traffic on realtor.com accelerating at a record rate and healthy revenue growth and robust lead volume for realtors. Mortgage lending trends are heartening for the long-term health of the U.S. housing market. HarperCollins performed impressively thanks to a strong backlist and the addition of Harlequin's powerful international and digital distribution network. Fox Sports Australia revenues expanded in local currency thanks in part to the country's success in the Asian Cup Football Tournament and Cricket World Cup, which drove audiences, advertising and a certain amount of adulation. Foxtel's necessary investment in long-term growth also produced an immediate increase in subscriptions, while churn remained at record low levels, indicating the inherent price elasticity in the offering. These returns highlight why Foxtel is such an integral part of News Corp's future. At the same time, being a global company, we are subject to international trends, with foreign exchange variations negatively affecting revenue by around 6% and EBITDA by 7%. And regional variations in advertising currents, particularly in the U.S., resulted in ad sales at The Wall Street Journal below expectations and prior year. We did, however, see an improvement in April though the marketplace remains volatile and short term in orientation. We have been candid from day 1 about print advertising trends globally, and we continue to innovate to deliver a suite of leading products that extend readership across multiple platforms and expand engagement throughout the day. In so doing, our print mastheads are becoming stronger branded assets in the digital age, and our audience relationship is itself a platform which we can leverage to benefit our real estate and other digital ventures. And REA Group, part of our Digital Real Estate segment, had a lower rate of revenue growth than in the first half magnified by certain seasonal factors, 2 of which will obviously not be a factor in the fourth quarter

[Bedi Ajay Singh:]

Thank you, Robert. First, I'd like to share with you some high-level financial highlights and then we'll discuss each segment in further detail. We reported fiscal '15 third quarter total revenues of $2.1 billion, almost flat with the prior year period. Excluding the impact of acquisitions, divestitures and foreign currency fluctuations, adjusted revenue declined 2% compared to the prior year. On EBITDA, we reported total segment EBITDA of $163 million compared to the prior year period of $175 million. This quarter includes $15 million of costs related to the U.K. Newspaper Matters, net of indemnification. Excluding those costs plus the impact of acquisitions, divestitures and foreign currency fluctuation, our adjusted total segment EBITDA was relatively flat with the prior year. While we reported a decline in segment EBITDA this quarter, this was mainly driven by currency headwinds; onetime or nonrecurring items, including an acceleration of stock-based comp at Move; and additional legal costs at News America. We do not believe these results are reflective of any run rate and expect to see an improvement in the fourth quarter, which I'll discuss shortly. And just as a reminder, for the first 9 months ended March 31, our reported and adjusted EBITDA increased 3% and 6%, respectively. As Robert noted, we were impacted by currency headwinds, primarily the weaker Australian dollar, which negatively impacted Q3 total reported revenues by $119 million or 6% and total reported segment EBITDA by $13 million or 7%. Adjusted EPS were $0.05 versus $0.11 in the prior year, and this year's results include a higher effective tax rate, lower equity earnings and lower interest income. Now let's turn to the individual operating segments. In News and Information Services, revenues for the quarter declined $135 million or 9% versus the prior year period. Approximately 60% of the revenue decline was related to currency. Adjusted segment revenues declined 3%. Within segment revenues, advertising, which was 54% of segment revenues this quarter, declined around 12% or 7% in local currency, which is relatively similar to last quarter. Looking at performance across our key units. At News Corp Australia, advertising revenues for the quarter declined around 16%. However, the decline was only 4% in local currency, relatively stable versus the prior quarter, helped by further market share gains in print and higher digital advertising sales. We saw continued improvement in yields, which was offset by weakness in a few categories including retail. National spending including tourism and energy were flat this quarter. At The Wall Street Journal, advertising declined around 11% versus the prior year. We saw weakness in print advertising across the board, in telecom and to a lesser extent, in finance. That said, while the market remains volatile, we expect a sequential improvement in the fourth quarter driven by digital. At News UK, advertising revenues remained soft this quarter, declining around 18% or 11% in local currency, but did show sequential improvement on a local currency basis. We were impacted by weakness in a few categories, including telecom, automotive and retail. As Robert noted, The Times performed well with ad revenues and local currency down only slightly, while The Sun remained soft this quarter. At News America Marketing, revenue declined 7% versus the prior year quarter due to continued weakness in freestanding inserts and a decline in sales of in-store products this quarter. This was related to consumer packaged goods spending, which was impacted by lower commodity prices, timing of product launches and a very tough year-ago comp, which was up more than 20%. Total circulation and subscription revenues, which accounted for 39% of segment revenues this quarter, declined 6% and were relatively flat in local currency. Dow Jones professional information business had a negative $11 million impact to revenues this quarter or $6 million excluding foreign currencies, an improvement from the sequential prior quarter. We remain encouraged by the underlying trends and the pipeline. We again saw growth in consumer circulation revenues in local currency led by improvement at The Wall Street Journal, which rose nearly 7% and at News Australia, which rose around 4%, largely driven by cover and subscription price increases. Segment EBITDA decreased $33 million in the quarter or 23% as compared to the prior year period, and adjusted segment EBITDA was down 21%. Included in segment EBITDA was an $8 million negative impact related to higher legal expenses at News America Marketing for the ongoing litigations. And to date, in fiscal 2015, litigation expenses at News America Marketing have totaled around $24 million. This quarter also included roughly $5 million of additional marketing spend at Dow Jones for its currently running Make Time campaign. Total segment cost continued to decline due to the benefits of past restructurings and lower printing and distribution costs. News Corp Australia continues to benefit from cost savings and relatively stable revenues in local currency. Turning now to the Book Publishing segment. Revenues improved 14% and segment EBITDA grew 6% versus the prior year quarter. Excluding the results from the Harlequin acquisition, which closed on August 1, and foreign currency fluctuations, adjusted revenues fell 5% versus the prior year and adjusted segment EBITDA declined 8% due to very tough comparisons from the Divergent series in the prior year period. While the Divergent series continued to sell well, this quarter totaling approximately 2.3 million net units, as expected, this was lower than the 8.5 million net units sold in the prior year period, creating a $44 million revenue challenge. Despite that challenge, the core HarperCollins business performed well thanks to the strength of its backlist, most notably Chris Kyle's American Sniper, which sold 2.7 million net units this quarter. Other notable titles included Harper Lee's To Kill a Mockingbird, Amy Poehler's Yes Please, as well as continued demand for Sarah Young's Jesus Calling series in Christian publishing. Total e-book sales for the quarter declined 3% and accounted for 22% of consumer revenues due to the Divergent year-ago comp combined with strong demand in nonfiction this quarter, which historically has had a lower conversion to e-books, which was partially offset by the inclusion of Harlequin. Regarding Harlequin, HarperCollins announced the rebranding of additional foreign language offices in the Netherlands, Japan, Nordic and Poland to add to the previously announced rebranding in Germany and Iberia this quarter. We remain on track with our cost synergy target of $20 million, most of which should be realized in our next fiscal year. In Cable Network Programming, revenues improved by $3 million or 3% compared to the prior year quarter. Subscription revenues grew 1%, benefiting from higher affiliate fees and increased subscribers. Advertising revenues rose 13%, driven by viewership gains from major events, such as the Cricket World Cup and the Asian Cup, which we didn't have in the prior year period. Segment EBITDA in the quarter was flat despite higher cost and negative impact from foreign currency fluctuations. Excluding the impact of foreign currency fluctuations, adjusted revenues and EBITDA both increased by 15%. In Digital Real Estate Services, total segment revenues increased $68 million or 67% and EBITDA declined 21% compared to the prior year period due to foreign currency and the inclusion of Move results. Excluding foreign currency fluctuations, REA's adjusted revenue and adjusted EBITDA grew 9% and 7%, respectively, as higher depth penetration and pricing was partially offset by lower-listing volume across the Australian market, most notably in March impacted, as Robert said, by the earlier Easter break and elections in 2 states. Please also note that the reported numbers vary from REA's reported numbers due to foreign currency translation as well as differences between Australian IFRS and U.S. GAAP. REA will be issuing their 9 months results under Australian IFRS and in Australian dollars shortly after this call. Reported segment results also include $73 million in revenues and an EBITDA loss of $9 million from Move. Move's EBITDA loss includes $11 million of stock-based compensation expense related to awards assumed in the acquisition, including acceleration of stock-based compensation resulting from the departures of senior executives. Excluding Move's stock-based comp, EBITDA would have been a positive $3 million this quarter. On a standalone basis, Move's revenue would've grown over 25% versus the prior year quarter led by Connection for Co-Brokerage [ph] product, which grew 130% versus the prior year. As Robert noted, audience growth at realtor.com continues to accelerate. Average monthly unique users in the third quarter were 39 million, growing 34% versus the prior year including record traffic in April of 44 million unique users. Mobile continues to drive realtor.com traffic growth, up over 71% year-over-year in the quarter. We're very pleased with the product development at realtor.com, which has broadly been in line, if not ahead, of our expectations and are now starting to dial up brand marketing to drive further market share gains. At Digital Education, revenues were flat with the prior year quarter and segment EBITDA improved $24 million to a loss of $21 million. About $12 million of that improvement was due to the capitalization of software development costs related to our digital ELA learning product with the balance from lower operating expenses. With respect to earnings from affiliates, Foxtel ended the quarter with around 2.8 million total subscribers, up 7% versus the prior year driven by cable satellite subscribers. Churn declined to a record low of 10.9% from 13.1% in the prior year quarter. Foxtel revenues for the quarter in local currency were up 1% versus the prior year and EBITDA declined mid-teens due to higher sports programming costs related to the acquisition of V8 Supercars and Formula 1 rights, higher fees paid to Fox Sports Australia combined with higher investment in marketing and customer service related to the new pricing and packaging offerings. Foxtel also incurred additional cost for triple play and Presto, Foxtel's SVOD product. However, these planned investments position Foxtel for sustainable growth, and we believe the results are very encouraging. Subscriber growth remains strong, with total subscribers up 182,000 year-over-year with growth of 85,000 in Q3. Year-to-date, new customer sales are up more than 50% [ph] over the prior period and spin-down volume remains below our expectations. Turning now to free cash flow. News Corp's cash flow from operations for the 9 months was $702 million compared to $803 million in the prior year, and free cash flow available to News Corp was $391 million compared to $496 million in the prior year. This decline was primarily due to the absence of net receipts related to the foreign tax refund of $73 million received last year, coupled with approximately $45 million of higher deferred compensation payments related to the acquisition of Wireless Generation. To note, foreign currency had a $15 million negative impact to year-to-date available free cash flow. The vast majority of our $2 billion cash on hand at the quarter end is in U.S. dollars. Let me turn briefly to our current fiscal fourth quarter. While currency is likely to remain a headwind in the short term, we expect to see year-over-year EBITDA improvement in the fourth quarter including, at News and Information Services, we expect to benefit from lower costs at News UK, which last year included severance costs, higher promotional spending around the World Cup and the London relocation. At Dow Jones, we anticipate a sequential improvement in advertising combined with ongoing operating efficiencies. At Book Publishing, the year-ago comp related to Divergent should ease significantly and should benefit from the Harlequin acquisition. Cable Network should benefit from higher subs, partially offset by modestly higher acquisition costs. And at Amplify, we expect to see continued operating expense declines in addition to the amounts capitalized. So in summary, we remain focused on driving long-term growth and believe News Corp is on the right track. While the ad market has been uneven and currency a clear headwind, we believe the steps we've taken and we're taking, both in reinvestments and operating efficiencies, are positioning the company for long-term growth. And with that, let me hand it over to the operator for Q&A.

[Operator:]

[Operator Instructions] We'll take our first question from Entcho Raykovski with Deutsche Bank.

[Entcho Raykovski:]

My question is just around Digital Real Estate Services, and you obviously mentioned that there was a slowdown in the March quarter within the REA Group. Are you able to give us an indication of what the trends were in the first 2 months if there was that sort of slowdown? Just looking to, I guess, extrapolate into the fourth quarter and what sort of price rates [ph] we can expect.

[Robert J. Thomson:]

Entcho, look, I think the best thing to do quite honestly for more granularity on REA is to talk to the REA executive team. What I can say is really that it was an unusual quarter given the uncertainty that is inevitably created by elections. As you well know, there was one in New South Wales and in Queensland. And the relatively early Easter meant that there was a slowdown in listings and it's a, quite frankly, a very listing-dependent business, but we have a lot of confidence in REA's prospects.

[Operator:]

We go next to John Janedis with Jefferies LLC.

[John Janedis:]

Can you give us an update on your return on capital plan? And to what extent the investment you're making in Amplify impacts the plan or the timing of when you share it?

[Bedi Ajay Singh:]

Thanks, John. So look, I think as we've said before when questions have come up on capital returns that our first priority is to remain focused on stabilizing the business, making sure that we're reinvesting smartly and also to look at acquisitions and you've seen the kinds of acquisitions we've done. I mean, having said that, we obviously focus on delivering shareholder value and per share growth. And when we came out of the gate a couple of years back, we did say that the company would expect to pay a dividend. And as you know, we still have our $500 million buyback authorization in place. And I think we can say that look, 2 years are almost coming to an end and we have said, and Robert has said that as well, that this is the time when we are going to be having, and indeed we are having, intensive discussions on our capital return policy. I think, look, the way we're kind of thinking about it, I would say, is that whatever we do, I think, would be reasonable and should be something that's sustainable. And as our business grows and our cash flow grows, we'd expect that to be growing. So I think that's kind of the way I'd frame it.

[Robert J. Thomson:]

Just to supplement Bedi's observations, as he made clear, there are a couple of conditions that will very much inform what we do

[Operator:]

We go next to Alexia Quadrani with JPMorgan.

[Alexia S. Quadrani:]

Earlier when you mentioned -- you said the investment spend in Amplify will be significantly reduced in fiscal '16, I guess any further color on sort of the magnitude of that reduction? And then just to follow up on News America, how we should think about the News America business longer term?

[Robert J. Thomson:]

Well, what I said is what I said, which is there would be a significant reduction in investment, but then let me be very clear that, that's not in any way to suggest that we are reducing our commitment to education. What we have in Amplify is world-class digital curriculum. What we're seeing now out in the field is a great deal of acceptance in classrooms, in school districts, in states, and we're very pleased by that. And so -- but there's a natural moment in the investment cycle in any new business where you do get variation and the variation that's upcoming is that which I indicated to you. We are very much on a path to profitability, but we are very much committed to improving education, improving the quality of the curriculum, the service to students and to the profitability principle.

[Michael Florin:]

And on NAM?

[Robert J. Thomson:]

And on News America Marketing, we see it as a very important part of News Corp. What we've noticed, for example, with realtor.com is significant amount of cooperation between the 2 companies. So I won't go into too much detail now. That would be premature. But there are, clearly, things that can be done in a way that enhance and leverage the competence and skills of both companies. And what we've seen, as you no doubt know, is a fair amount of competition in the FSI business. We're looking at costs there, as one must. But longer term, we're very confident about not only the traditional businesses at NAM, but the digital opportunities and the opportunities that exist to further extend the expertise that NAM has into other parts of News Corp.

[Operator:]

We go next to Bill Bird with FBR.

[William G. Bird:]

You touched on better trends in April, The Wall Street Journal. I was just wondering if you could speak to just your overall, I guess, outlook on print advertising over coming months.

[Robert J. Thomson:]

Look, it's always perilous to prognosticate too much. But I think what we were trying to indicate was that the currents of the last quarter, Q3, was not a harbinger of worst to come in the current quarter. But when you look at the advertising market, there's no doubt that there are short-term trends in place. We have seen, for example, a recovery in telco advertising or also an increase in device-related advertising with new products like the Samsung Galaxy 6. But more generally, there are shifts in the advertising market that I think longer term, we're confident will play out to our strengths. In particular, if you look where large companies are spending at least some of their money, there are too many meaningless placements on frivolous sites. And in the end, we're very confident about our mastheads. We're very confident about the power of print. We're also very confident about the halo effect of a masthead in digital formats. And in the end, advertisers will return to quality, which is why our advertising teams around the world, in the U.S., U.K. and Australia, are reaching out to clients to articulate the virtues of our platform relative to something that's cyber superficial.

[Operator:]

We go next to Craig Huber with Huber Research Partners.

[Craig A. Huber:]

Yes, I want to focus on the cost within your -- on newspaper division. Can you give us a sense, please, how much the costs were down adjusting for foreign currency in Australia, the U.K. papers and then separately, The Wall Street Journal? I just want to get a sense there, please.

[Bedi Ajay Singh:]

I mean, we don't actually break out sort of the cost by each of those individual units. But what I can tell you overall is that we've had meaningful declines, excluding legal expense, the onetime legal cost that I mentioned, across most of our operating units. Some of that is because of past restructurings that we've done, and I think some of that is because we've had, for example, better pricing on news print and we basically looked at backroom operations. There's been a lot of cost reduction, I would say, across all of the units. This is by no means to say we're done, and we're continually evaluating the cost base. But again, we want to be careful that we're not cutting into kind of our key competitive strengths on the content side.

[Robert J. Thomson:]

Just to complement Bedi's answer, I think one of the things we emphasized at the time of the formation of the new News 2 years ago was that the extra focus would allow us to make comparisons between our businesses and see where there were costs and also to be very incisive about, for example, one area which in a digital age is going to be expensive, our technology investment. And what we're seeing is that the close relationships between our newspaper groups around the world are allowing us to see where there are areas where we can make cuts. But as Bedi emphasized, we will always invest in quality and we have tremendous faith in our newspapers, both in print and in digital.

[Operator:]

[Operator Instructions] We go next to Michael Morris with Guggenheim Securities.

[Michael C. Morris:]

I think it's been about 1.5 years since you guys shared with us the investments that you made in the exclusive soccer rights in the U.K. I'm curious if you can give us an update on how that's impacted the business, whether it's had the impact on the business that you hoped it would and also how much longer you have those rights for and whether that's something that you would look to continue at the current terms given that impact.

[Robert J. Thomson:]

Well, what we have at The Sun is around 200,000 digital subscribers. We've also seen an increase in ARPU at The Sun with our digital subscriptions, and it has created both affinity and intensity that is of value to us, not just for circulation revenue but also for advertising revenue. We have those rights for another 12 months beyond the -- this Premier League season. As with any rights, we are certainly not going to overpay. We look at the monetization prospects. We believe for certain types of rights and certain types of countries that we're in a position to monetize better than others, but we will certainly not overpay.

[Operator:]

We go next to Justin Diddams with Citi.

[Justin Diddams:]

Just a question for me on Foxtel. Can you give us a sense of how much of the cost in the third quarter was nonrecurring or related to that upfront investment in marketing the new pricing plans and putting together Presto and triple play and what you expect the cost base growth profile to look like going forward?

[Bedi Ajay Singh:]

Thanks, Justin. So I mean, look, basically obviously with the launch of the new pricing package and the launch of Presto, there was the sort of call it [ph] the marketing and customer service investment that's made. Clearly, the subscribers have come on, but the full impact of their revenue hasn't probably been felt in the quarter. So that will translate into better sort of profitability as we go forward. You'd expect to invest something more in marketing because you're still trying to grow subscribers, and you'd expect that some of the customer service costs, as your subscriber base grows, would increase a little bit. But basically, the unit economics of the business are unchanged, and we expect because the subscriber uptake so far has been very good, that we -- the prognosis is good for Foxtel.

[Robert J. Thomson:]

Just to further Bedi's point, as you know, we've long indicated that we were unhappy with the level of penetration of Foxtel in Australia. We believe it's a great service that if people experience it, they'll like it. And so it's an important period of investment, and as Bedi indicated, the early signs are very good. New customer sales are up 52% year-to-date and since November to the end of March, they're up 75%.

[Operator:]

We go next to Christian Guerra with Goldman Sachs.

[Christian Guerra:]

Question for you on Foxtel. I was just wondering if you could maybe talk about -- I mean, you've talked about the subscriber impact and in fact, you're seeing some good growth there in subscriber numbers. Just wondering if you could maybe talk about the impact on ARPU from the fairly dramatic cut in that base sort of package price?

[Bedi Ajay Singh:]

Thanks, Christian. ARPU has actually been relatively stable. It's a little bit down, but it's been remarkably stable and sports penetration has been pretty much along the lines of what we were expecting.

[Robert J. Thomson:]

I think, Christian, the question that we had was whether there would be much spin down, and I think it's fair to say that the spin down has been significantly less than forecast or feared.

[Operator:]

We go next to Brian Han with Morningstar Research.

[Brian Han:]

I also have a question on Foxtel. Robert, you mentioned that you're confident of increasing pay-TV penetration in Australia, but it's been stuck around current levels for many years now. And with all these new streaming services coming on board, what gives you confidence that pay-TV penetration will increase going forward?

[Robert J. Thomson:]

Well, certainly, we had to do something different. And so indeed, Richard Freudenstein and the team reduced prices at the -- for the essentials package and the sports package, down [ph] from 50 to 25 and 75 to 50. That was necessary as was clever marketing. Now I think it will benefit Foxtel and its portfolio, for there to be close scrutiny during a period of intense marketing. On the quality of the programming that Foxtel has, there is no doubt it's programming is preeminent and you have a period now of a certain amount of flux in the Australian market, and I think it's flux that should work to our benefit given the quality and the quantity of our programming compared to that of inferior competitors.

[Operator:]

We go next to Doug Arthur with Huber Research.

[Douglas M. Arthur:]

Bedi, just going back to News and Information Services for a second. Just trying to get a sense of the underlying growth in circulation and subscription revenues. If you adjust for currency and kind of sidebar professional information for a second, are you seeing underlying growth from price increases and/or digital subscribers in revenues there?

[Bedi Ajay Singh:]

Yes, so actually, currency adjusted, we're seeing growth on circulation in all of the markets. In Australia, circulation revenue was up 4%. In -- as I said, The Wall Street Journal was up 7% and then the U.K. was pretty much flat. So I think it's good revenue trends.

[Operator:]

There are no further questions at this time. I'd like to turn the conference back over to Mike Florin for any additional or closing comments.

[Michael Florin:]

Well, thank you for your time today. Have a great day and we'll talk to you next quarter.

[Operator:]

Ladies and gentlemen, this does conclude today's presentation. Thank you for your participation.