News Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2014 (fiscal 2015); comparisons are with the corresponding 2013 periods. Amounts are in U.S. dollars, millions, except per-share data. The company operates across news and information, book publishing, Australian cable sports, digital real estate, digital education and other activities.
Financial performance and liquidity
| Metric | Quarter ended Dec. 31, 2014 | Prior-year quarter | Six months ended Dec. 31, 2014 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $2,280 | $2,238 | $4,430 | $4,310 |
| Segment EBITDA | $328 | $327 | $498 | $468 |
| Net income | $163 | $166 | $251 | $204 |
| Net income attributable to News Corp stockholders | $143 | $151 | $208 | $178 |
| EPS, basic and diluted | $0.24 | $0.26 | $0.36 | $0.31 |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $492 | $407 |
- Quarterly revenue rose 2%; six-month revenue rose 3%. Segment EBITDA was nearly flat for the quarter and increased 6% for the six months. As a percentage of revenue, Segment EBITDA was approximately 14.4% and 14.6% for the quarterly periods, and 11.2% and 10.9% for the six-month periods. Segment EBITDA is a company-defined non-GAAP measure.
- Quarterly net income attributable to stockholders fell 5%, while six-month attributable income increased 17%. The six-month comparison benefited from stronger segment EBITDA, lower restructuring and impairment charges, lower depreciation and higher Foxtel equity earnings.
- Six-month free cash flow available to News Corporation, a non-GAAP measure, was $275, up from $217. Capital expenditures were $183, including $41 for the London relocation and $29 for Amplify curriculum products.
- Cash and cash equivalents were $1,918 at December 31, down from $3,145 at June 30. Cash from operations was outweighed by acquisition and investment spending. Current assets were $4,052 and current liabilities $2,329; the resulting current ratio was approximately 1.7, versus 2.3 at June 30.
- The balance sheet reports no outstanding borrowings. A $650 unsecured revolving facility, expandable to $900 subject to conditions, was undrawn; the company reported covenant compliance. The facility matures in October 2018, subject to its terms.
Material changes and drivers
- News and Information Services remained the largest segment but weakened: six-month revenue declined 4% to $2,974 and Segment EBITDA fell 17% to $321. Print advertising weakness, currency effects and lower circulation/subscription revenue were key factors.
- Book Publishing revenue rose 22% for the six months to $875, mainly reflecting the August 2014 Harlequin acquisition; Segment EBITDA increased 19% to $132. Lower Divergent-series sales partly offset gains.
- Digital Real Estate Services six-month revenue rose 38% to $266 and Segment EBITDA increased 15% to $114, reflecting REA Group growth and the November Move acquisition. Move contributed acquisition-related costs and an EBITDA loss during the period.
- Cable Network Programming six-month revenue increased 4% to $251 and Segment EBITDA rose 5% to $86. Digital Education revenue increased 31% to $64; its Segment EBITDA loss narrowed to $48 from $95, partly due to capitalization of software development costs.
- The company acquired Harlequin for $414 net of cash acquired and acquired Move in November. Move’s transaction value was reported as $952, including assumed debt and post-combination award value, net of acquired cash. It also invested approximately $100 in iProperty and $60 in SEEK Asia.
Outlook, commentary, risks and contingencies
- The company does not ordinarily provide projections of future operating results. It expected to invest approximately $230 in cash in Digital Education during the fiscal year ending June 30, 2015, including approximately $50 of deferred compensation related to Wireless Generation.
- Management said internally generated funds, cash on hand and potential capital-market access should meet foreseeable liquidity needs, while noting financing access depends on performance, credit standing, market liquidity and economic conditions. Some foreign cash is not readily accessible, including cash held by separately listed REA Group; certain foreign earnings are intended to remain reinvested abroad.
- Key operating risks include continued print advertising and circulation declines, competition and changing media consumption, currency movements, newsprint costs, sports-rights renewals, and the execution and profitability of acquisitions and Digital Education. Move’s realtor.com relationship depends on agreements with the National Association of Realtors.
- U.K. Newspaper Matters remain a significant legal and reputational contingency. The company accrued approximately $112 for filed claims and incurred costs, with approximately $55 expected to be indemnified by 21st Century Fox. Additional exposure cannot be estimated; certain criminal fines or penalties are not covered by the indemnity. On January 28, 2015, the DOJ notified the company it had completed its investigation and declined prosecution; U.K. investigations and civil claims continue.
- Other proceedings include antitrust claims involving News America Marketing and unresolved matters concerning HarperCollins e-book settlements, as well as stockholder litigation over an extension of the rights agreement. The company says outcomes of these matters cannot be predicted. It also notes potential tax liabilities and indemnification obligations connected with the separation from 21st Century Fox.
- Unusual comparability item: prior-year results included foreign tax-refund benefits and offsetting expenses payable to 21st Century Fox—$238 for the quarter and $721 for the six months—so those items had no net effect on reported income. Current-period other income included a $29 gain on REA Group’s sale of marketable securities.
- Other comprehensive loss attributable to News Corp stockholders was $270 for the quarter and $663 for the six months, largely reflecting foreign currency translation losses of $456 and $930, respectively.
Important facts for investors to verify
- Whether News and Information Services can stabilize advertising and circulation trends, and whether digital revenue can offset ongoing print-market pressure.
- Move’s integration, underlying operating performance excluding one-time acquisition costs, and the status and terms of its relationship with the National Association of Realtors.
- Cash use and liquidity following the acquisitions, including cash held by foreign subsidiaries or REA Group and planned Amplify investment.
- Progress, potential unindemnified costs and changes in accrued liabilities for U.K. Newspaper Matters and other significant litigation.
- The effect of currency changes, restructuring, and software-cost capitalization on reported segment performance and margins.