News Corporation — Form 10-Q Summary
Reporting period: Three months ended September 30, 2018, the first quarter of fiscal 2019 (not calendar 2018 Q1). The filing compares results with the three months ended October 1, 2017. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and reporting period
News Corp is a diversified media and information services company, with businesses in news and information, subscription video, book publishing and digital real estate. In April 2018, it combined its Foxtel and FOX SPORTS Australia interests with Telstra; News Corp owns 65% and began consolidating the combined Foxtel business in fiscal 2018 Q4. This materially affects year-over-year comparisons.
Financial performance and liquidity
| Metric | Q1 FY2019 | Comparable prior period |
|---|---|---|
| Revenue | $2,524 | $2,058 reported; $2,593 pro forma including Foxtel |
| Income before tax | $178 | $141 reported; $171 pro forma |
| Net income | $128 | $87 reported; $114 pro forma |
| Net income attributable to News Corp shareholders | $101; diluted EPS $0.17 | $68; diluted EPS $0.12 |
| Total Segment EBITDA | $358 | $248 reported; $375 pro forma |
| Operating cash flow | $113 | $(4) |
| Capital expenditures | $133 | $62 |
| Free cash flow available to News Corp (non-GAAP) | $(21) | $(60) |
| Cash and cash equivalents at period end | $1,886 | $2,034 at June 30, 2018 |
| Total borrowings | $1,857 | $1,952 at June 30, 2018 |
Reported revenue increased 23% year over year, largely because the current quarter includes consolidated Foxtel. Against the prior-year pro forma comparison, revenue declined 3% and Segment EBITDA declined from $375 million to $358 million. Net income attributable to News Corp was $20 million above the pro forma prior-year figure.
Approximate net margin was 5.1% in the current quarter, versus 4.2% on the reported prior-year basis and 4.4% on the pro forma basis. Total Segment EBITDA margin was about 14.2% of revenue, versus 12.1% reported and 14.5% pro forma. These are calculated ratios; Segment EBITDA is a non-GAAP measure.
Current assets were $4,469 million and current liabilities $3,545 million at September 30, implying a current ratio of approximately 1.26. Cash exceeded reported borrowings by $29 million, but $835 million of cash was held by foreign subsidiaries, including $63 million at separately listed REA Group that is not readily accessible without a dividend declaration. The company reported covenant compliance and had not drawn on its $650 million revolving facility; Foxtel also had $251 million of undrawn commitments.
Material changes versus the prior comparable period
- Foxtel contributed $425 million of revenue and $86 million of Segment EBITDA in the quarter. On a pro forma basis, Subscription Video Services revenue fell $115 million and EBITDA fell $41 million, reflecting lower subscriptions and advertising, subscriber mix, foreign exchange and lower pay-per-view contribution, partly offset by lower programming costs.
- News and Information Services revenue was nearly flat at $1,248 million, while EBITDA increased to $116 million from $74 million. The EBITDA comparison benefited from a $48 million gain related to exiting the Sun Bets partnership. Advertising revenue declined $44 million, with print market weakness and currency effects; circulation and subscription revenue rose modestly.
- Book Publishing revenue rose 4% to $418 million and EBITDA rose to $68 million, supported by title mix and sales. Digital sales were about 22% of consumer revenue and grew approximately 12%.
- Digital Real Estate Services revenue increased 8% to $293 million and EBITDA rose 11% to $105 million, with growth at REA Group and Move.
- Foreign currency movements reduced reported revenue by $49 million; the pro forma comparison cited a $90 million revenue headwind.
- Operating cash flow improved by $117 million, but higher capital spending left free cash flow available to News Corp negative. Capital expenditures included $69 million for Foxtel.
Outlook, management commentary, risks and unusual items
- Management said cash on hand, expected operating cash generation and borrowing-market access should meet foreseeable liquidity needs, including debt repayment. The company does not ordinarily provide projections of future operating results; no specific earnings guidance was given.
- Approximately $447 million and $541 million of Foxtel Group debt mature in fiscal 2019 and 2020, respectively; management expects to fund repayments primarily with new borrowings. REA Group also had approximately $86 million due in December 2018, expected to be repaid primarily with cash.
- In October 2018, after quarter-end, the company acquired Opcity for approximately $210 million in total transaction value, including about $182 million cash net of acquired cash. Deferred payments and restricted stock awards of about $28 million are expected to be recognized as compensation expense over three years.
- ASC 606 adoption reduced the opening accumulated deficit by $20 million. Its net impact on current-quarter revenue was a $17 million reduction and on net income a $5 million increase; the filing notes specific changes to customer payments, installation revenue and REA trailing commissions.
- Interest expense increased in the reported comparison following consolidation of Foxtel debt. The quarter also included $18 million of restructuring charges, primarily employee termination benefits.
- The effective tax rate was 28% on a pro forma comparison basis; management cited valuation allowances on certain foreign tax benefits and higher-tax foreign operations. The company was still finalizing certain provisional Tax Act accounting estimates.
- Legal matters include Valassis antitrust litigation, for which the company said it could not estimate a possible loss, and U.K. Newspaper Matters. The company accrued approximately $47 million for the latter and recorded a corresponding $47 million receivable under the indemnity from 21st Century Fox. Additional claims and costs remain uncertain.
- At quarter-end, News Corp had $1.9 billion in borrowings. Derivatives are used to manage currency and interest-rate exposures, not for trading or speculation. Management reported no material change in its market-risk assessment or risk factors from the latest annual report.
Important facts for investors to verify
- Compare reported results with the filing’s pro forma Foxtel figures; reported year-over-year growth is substantially affected by consolidation.
- Assess whether Subscription Video Services can stabilize revenue and EBITDA after the pro forma declines, and review subscriber mix, advertising and programming-cost trends.
- Review Foxtel debt maturities, refinancing assumptions, interest exposure and the availability of cash across subsidiaries.
- Monitor cash conversion, capital expenditure and the continued negative free cash flow available to News Corp.
- Track the final purchase-price allocation and operating contribution for Foxtel, and the purchase accounting and performance of Opcity.
- Follow the resolution and potential financial or reputational impact of legal proceedings, tax examinations and remaining Tax Act estimates.