Business context and reporting period
News Corporation’s Form 10-Q covers the quarter ended December 31, 2019, the second quarter of fiscal 2020; fiscal year-to-date figures cover the six months ended that date. The company operates across News and Information Services, Subscription Video Services, Book Publishing, Digital Real Estate Services and Other. Amounts below are in U.S. dollars unless noted.
Financial performance and position
| Metric | Three months ended Dec. 31, 2019 | Prior-year quarter | Six months ended Dec. 31, 2019 | Prior-year period |
|---|---|---|---|---|
| Revenue | $2.479 billion | $2.627 billion | $4.819 billion | $5.151 billion |
| Net income (loss) attributable to News Corp stockholders | $85 million | $95 million | $(142) million | $196 million |
| Diluted earnings (loss) per share | $0.14 | $0.16 | $(0.24) | $0.33 |
| Segment EBITDA | $355 million | $370 million | $576 million | $728 million |
| Cash provided by operating activities | Not provided quarterly | $192 million | $358 million |
Quarterly revenue declined 6%; six-month revenue declined 6%. Segment EBITDA margin was approximately 14.3% for the quarter versus 14.1% a year earlier, and 12.0% year to date versus 14.1%. The six-month net loss included $292 million of non-cash impairment charges, primarily at News America Marketing (NAM), and $34 million of restructuring charges. Total impairment and restructuring charges were $326 million, compared with $37 million in the prior-year period.
Six-month operating cash flow fell $166 million year over year to $192 million. Capital expenditures were $237 million, leaving cash flow after capital expenditures of negative $45 million. The company’s non-GAAP free cash flow available to News Corporation was negative $96 million, versus positive $26 million a year earlier.
At December 31, cash and cash equivalents were $1.272 billion, down from $1.643 billion at June 30, 2019. Borrowings were $1.201 billion, all classified as non-current; the company had no borrowings under its new $750 million corporate revolving facility. Current assets were $3.718 billion and current liabilities $2.727 billion. Operating lease liabilities totaled $1.526 billion on a present-value basis, recognized following adoption of the new lease standard.
Material changes versus the prior comparable period
- All major segments reported lower six-month revenue and EBITDA. News and Information Services revenue fell 5% and EBITDA 10%; Subscription Video Services revenue fell 10% and EBITDA 23%; Book Publishing revenue and EBITDA each fell 7% and 28%, respectively; Digital Real Estate Services revenue fell 6% and EBITDA 12%.
- News and Information Services had stronger quarterly EBITDA, up 27%, supported by cost savings and a $22 million one-time benefit from settlement of warranty-related claims. Year-to-date EBITDA declined, including the absence of a prior-year $48 million Sun Bets partnership-exit benefit.
- Subscription Video Services was affected by lower broadcast subscribers, package mix and currency; higher Kayo and Foxtel Now revenue partly offset declines. Book Publishing faced lower sales of several prior-year bestsellers. Digital Real Estate Services was affected by lower Australian property listing volumes, currency and investment in Opcity.
- The company completed Foxtel and REA Group debt refinancings. Total borrowings decreased from $1.453 billion at June 30 to $1.201 billion at December 31, while repayments and new facility drawdowns produced substantial financing activity.
Outlook, commentary, risks and unusual items
- Management said cash on hand, expected operating cash flow and credit-market access should meet foreseeable liquidity needs, including debt repayment, but noted future financing access depends on business performance, ratings, debt terms and market conditions. The company does not ordinarily provide operating projections.
- News Corp was negotiating a potential sale of NAM, but gave no assurance as to timing or completion. The impairment reflected lower estimated fair value amid strategic review and market indicators.
- In January 2020, the company sold Unruly for approximately 7% of Tremor International’s shares, subject to cash adjustments and an 18-month restriction on selling the shares. A three-year commercial agreement grants Tremor exclusive rights to sell outstream video advertising on News Corp digital properties and provides a £30 million total minimum revenue guarantee to News Corp.
- In February 2020, Foxtel entered into a subordinated Telstra shareholder-loan facility of up to A$170 million, bearing BBSY plus 7.75% and maturing in December 2027. The board also declared a semi-annual dividend of $0.10 per share, payable April 15, 2020.
- Material risks include antitrust litigation involving NAM, including the Valassis case scheduled for trial in June 2020, and uncertainty around other legal matters. U.K. Newspaper Matters had a $58 million accrued liability and an approximately $60 million receivable from FOX at December 31; further claims and outcomes remain uncertain. The filing also identifies possible restrictions on U.S. media acquisitions under FCC rules and separation-agreement terms.
- Foreign-exchange movements reduced revenue by $50 million in the quarter and $134 million year to date. Tax expense was $31 million despite the six-month pre-tax loss, in part because of impairment tax treatment and valuation allowances on certain deferred tax assets.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material change in market-risk assessment was reported.
Important facts for investors to verify
- Whether NAM is sold, and the effect of its continuing revenue and operating pressures on valuation and results.
- Underlying segment trends, especially print advertising, Foxtel subscriber losses and the growth and profitability of Kayo and Foxtel Now.
- Cash conversion and capital needs: operating cash flow declined, and free cash flow available to News Corp was negative $96 million for the half-year.
- Debt and liquidity terms, covenant headroom at Foxtel and REA Group, and the implications of shareholder loans and lease obligations.
- Potential liabilities and recoveries from NAM litigation, U.K. Newspaper Matters and tax examinations, including the FOX indemnification receivable.
- The completion and accounting effects of the Unruly sale and related £30 million minimum revenue guarantee.