News Corporation — Form 10-Q Summary
Period clarification: The filing is for the quarter ended March 31, 2019, News Corp’s fiscal 2019 third quarter—not 2018 Q3. It reports three- and nine-month results against the comparable prior-year periods. Unless stated otherwise, amounts are in U.S. dollars and millions.
Business context and reporting period
News Corp is a diversified media and information services company spanning News and Information Services, Subscription Video Services, Book Publishing, Digital Real Estate Services, and Other. In April 2018, News Corp combined its Foxtel and FOX SPORTS Australia interests with Telstra’s Foxtel interest; News Corp owns 65% and began consolidating the combined business in fiscal 2018’s fourth quarter. This materially affects comparisons with reported prior-year results.
Financial performance and position
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue, 2019 | $2,457; up 17% | $7,608; up 20% |
| Net income (loss), 2019 | $23 | $270 |
| Net income (loss) attributable to News Corp stockholders, 2019 | $10; $0.02 per share | $206; $0.35 per share |
| Total Segment EBITDA, 2019 | $247 | $975 |
| Operating cash flow, 2019 | Not presented for the quarter | $661 |
| Capital expenditures, 2019 | Not presented for the quarter | $417 |
Total Segment EBITDA is a non-GAAP measure. Reported EBITDA margin was approximately 10.1% for the quarter, versus 8.6% in the prior-year reported quarter; comparisons are affected by the Foxtel transaction. On a pro forma basis reflecting Foxtel in both periods, quarterly EBITDA was $247 versus $292 and nine-month EBITDA was $975 versus $1,117. Pro forma revenue was $2,457 versus $2,587 for the quarter and $7,608 versus $7,871 for nine months, indicating weaker underlying year-over-year performance on that comparison.
At March 31, 2019, cash and cash equivalents were $1,648, total borrowings were $1,546 (including $678 current), and total equity was $10,458. Consolidated cash exceeded borrowings by $102, though some cash is held by foreign subsidiaries and $49 was held by separately listed REA Group and not readily accessible. Current assets were $4,247 and current liabilities $3,679. Operating cash flow increased $196 year over year to $661, while free cash flow available to News Corp, a non-GAAP measure, declined to $149 from $184, mainly due to higher capital spending.
Cash used in investing was $523, including $417 of capital expenditures and $187 for acquisitions, primarily Opcity. Cash used in financing was $501, including $801 of debt repayments, partly offset by $450 of new borrowings. Debt declined from $1,952 at June 30, 2018. The company had an undrawn $650 revolving facility and $241 of undrawn Foxtel Group commitments; it reported compliance with debt covenants.
Material changes versus the prior comparable period
- Reported revenue rose principally because Foxtel was consolidated: the transaction contributed $418 of quarterly revenue and $1,289 for nine months. Subscription Video Services reported EBITDA of $98 for the quarter and $295 for nine months; the transaction contributed $96 and $236, respectively.
- On a pro forma basis, Subscription Video Services revenue fell 13% for the quarter and 14% for nine months; EBITDA fell 23% and 32%. Lower broadcast subscribers, subscriber package mix, foreign exchange, higher sports programming costs and Kayo Sports marketing costs weighed on results. Foxtel Now and Kayo Sports revenue gains partly offset declines.
- News and Information Services revenue decreased 5% for the quarter and 3% for nine months, with print advertising weakness, News America Marketing declines and currency headwinds. Digital subscriber growth and cover-price increases partly offset these pressures.
- Book Publishing revenue increased 6% for the quarter and 5% for nine months; EBITDA increased 29% and 25%, respectively, supported by book sales. Digital sales were approximately 21% of consumer revenue for the quarter and 20% for nine months.
- Digital Real Estate Services revenue decreased 3% for the quarter but increased 4% for nine months. Segment EBITDA fell 16% for the quarter and 1% for nine months, reflecting investment and costs associated with Opcity, among other factors.
- Net income improved substantially against prior-year losses, mainly because fiscal 2018 included a $957 non-cash Foxtel investment write-down and $225 of other impairment charges. The prior-year nine-month period also included a $174 tax charge related to U.S. tax reform. Thus, the profit comparison reflects significant unusual prior-year items.
- Depreciation and amortization increased to $168 from $100 for the quarter and to $494 from $297 for nine months, largely due to consolidated Foxtel assets and purchase accounting.
Outlook, commentary, risks and unusual items
- Management said it does not ordinarily provide projections of future operating results. It expects cash on hand, future operating cash flow and available borrowing capacity to meet foreseeable liquidity needs, but cautioned that capital-market access depends on business performance, credit ratings, debt terms and market conditions.
- Management expects new Foxtel’s fiscal 2019 capital expenditures to exceed fiscal 2018 by approximately $25. Debt repayments of approximately $142 in fiscal 2019 and $366 in fiscal 2020 were expected to be funded primarily by cash and refinancing; REA Group also had approximately $170 maturing in December 2019.
- Foxtel subscriber declines led management to identify a Subscription Video Services reporting unit and indefinite-lived tradename as at risk of future impairment. The reporting unit’s fair value exceeded carrying value by approximately 6% at December 31, 2018; specified adverse valuation changes could cause the reporting unit to fail impairment analysis. News Corp identified approximately $2.3 billion of goodwill and indefinite-lived tradename at risk across the cited reporting units.
- Foreign-exchange movements reduced reported revenue by $90 for the quarter and $206 for nine months versus the prior-year periods. Other pressures include print advertising weakness, lower print volumes, broadcast subscriber declines, sports programming costs and uncertain real-estate listing volumes at REA Group.
- News Corp recorded restructuring charges of $25 for the quarter and $62 for nine months, primarily employee termination benefits. The company adopted ASC 606 in fiscal 2019; it reduced reported revenue by $17 for the quarter and $54 for nine months, with no material net-income impact. Prior periods were not restated.
- Legal matters include the Valassis antitrust litigation: the court ruled News America Marketing’s bidding practices lawful but allowed certain other contracting-practice claims to proceed. The company could not estimate a loss range for disclosed contingencies. U.K. Newspaper Matters accrued liabilities were approximately $54, with an approximately $51 indemnification receivable following transfer of the indemnity obligations to Fox Corporation.
- The company reported no material change in risk factors from its 2018 Form 10-K and no material change in market-risk assessment. Income-tax expense was $112 for nine months; valuation allowances and higher-tax foreign operations contributed to an effective tax rate above the U.S. statutory rate.
Important facts for investors to verify
- Use pro forma, rather than reported, comparisons when assessing underlying performance after Foxtel consolidation; review the segment-specific subscriber, pricing and cost trends.
- Monitor Foxtel’s subscriber trajectory and impairment headroom, along with the assumptions underlying the approximately $2.3 billion of identified at-risk goodwill and tradename.
- Assess debt refinancing and maturity funding, especially Foxtel Group and REA Group obligations, and distinguish consolidated cash from cash not readily accessible to the parent.
- Track free cash flow after elevated capital expenditures, including management’s stated expectation for Foxtel capital spending.
- Review exposure to print advertising and circulation declines, foreign exchange, litigation outcomes and uncertain tax examinations.
- Confirm the reporting-period label: this filing covers fiscal 2019 Q3, despite the request metadata stating 2018 Q3.