NEWS CORP quarterly report, Q2 FY2018

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Business context and reporting period

News Corporation’s Form 10-Q covers the quarter and six months ended December 31, 2017 (fiscal 2018), compared with the corresponding prior-year periods. The company operates across news and information services, book publishing, digital real estate, and Australian cable network programming. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.

Financial results and position

  • Revenue: Quarterly revenue rose 3% to $2.18 billion; six-month revenue rose 4% to $4.24 billion. Advertising revenue fell 6% in the quarter to $702 million, while circulation and subscription revenue rose 7% to $637 million.
  • Profit: The quarter recorded a $66 million net loss, including an $83 million loss attributable to News Corporation stockholders, versus a $219 million net loss in the prior-year quarter. For six months, net income was $21 million, but the loss attributable to stockholders was $15 million, compared with a $304 million stockholder loss a year earlier. Quarterly diluted loss per share was $0.14; six-month loss per share was $0.03.
  • Segment EBITDA: The company’s non-GAAP measure was $329 million for the quarter, versus $325 million, and $578 million for six months, versus $455 million. Approximate consolidated Segment EBITDA margins were 15.1% and 15.4% for the quarterly periods, and 13.6% and 11.2% for the six-month periods, respectively.
  • Cash flow: Six-month cash provided by operating activities was $204 million, versus $4 million. Investing activities used $176 million and financing activities used $202 million. Cash and cash equivalents declined $174 million to $1.856 billion. The company’s non-GAAP free cash flow available to News Corporation was $16 million, versus negative $160 million.
  • Liquidity and debt: Current assets were $3.718 billion and current liabilities $2.270 billion at December 31. Balance-sheet borrowings totaled approximately $281 million, including $94 million current and $187 million non-current. REA Group had approximately $280 million remaining on its revolving facility after repaying $93 million; the parent’s $650 million revolving credit facility was undrawn. The company reported compliance with applicable debt covenants.
  • Dividends: The company paid $0.10 per share in October 2017 and declared a further $0.10 per share, payable April 18, 2018.

Material changes versus the prior comparable period

  • Digital Real Estate Services led growth: quarterly revenue increased 21% to $292 million and Segment EBITDA rose 25% to $119 million; for six months, revenue increased 20% to $563 million and EBITDA rose 32% to $214 million.
  • News and Information Services revenue was nearly flat in the quarter and up 1% for six months. Circulation and subscription gains, including digital subscriber growth and price increases, were offset by print-advertising weakness and lower News America Marketing revenue. Six-month segment EBITDA rose 13% to $213 million, helped by cost savings.
  • Book Publishing revenue and EBITDA increased modestly for both periods. Cable Network Programming revenue grew, partly from the ANC acquisition, but EBITDA declined 35% in the quarter and 8% for six months, reflecting programming costs.
  • Quarterly and six-month results benefited from the absence of prior-year non-cash charges: a $310 million impairment, primarily on Australian newspaper assets, and a $227 million write-down of the Foxtel investment. Restructuring charges were $12 million for the quarter and $27 million for six months, versus $47 million and $67 million, respectively.
  • Operating cash flow improved primarily because the prior-year period included $250 million of NAM Group settlement payments. Revenue and expense comparisons also benefited from foreign-exchange movements.

Outlook, commentary, risks and unusual items

  • The company says it does not ordinarily provide projections of future operating results. Management stated that available cash, expected operating cash flow and potential capital-markets access should meet foreseeable liquidity needs, while noting that future financing access depends on performance, credit conditions and markets.
  • The Tax Cuts and Jobs Act produced a provisional $174 million tax charge in the quarter: an estimated $34 million deemed-repatriation charge and $140 million from remeasuring U.S. deferred tax assets. This contributed to a $235 million quarterly tax charge on $169 million of pretax income and a $289 million six-month tax charge on $310 million of pretax income. The company said its accounting was not final and could change materially during the measurement period.
  • Management cited continuing print-advertising weakness, including in Australia and the U.S., and lower News America Marketing revenue. Foxtel’s six-month operating income fell to $120 million from $184 million; its revenue increased slightly in U.S. dollars but declined 2% in local currency. The company also recorded $13 million of non-cash write-downs on other equity-method investments in the quarter.
  • News Corp and Telstra announced a non-binding proposed combination of their Foxtel and FOX SPORTS Australia interests. The contemplated ownership split is 65% News Corp and 35% Telstra; definitive agreements and other conditions remained outstanding.
  • Legal matters include Valassis antitrust litigation and U.K. Newspaper Matters claims. The company said outcomes and potential losses for certain matters cannot be estimated; it had accrued $54 million for U.K. Newspaper Matters, with approximately $52 million expected to be indemnified by 21st Century Fox. Tax examinations and potential assessments are also uncertain.
  • Foreign-currency translation affects reported results; the company does not hedge translation exposure. The filing also notes a pending appeal concerning FCC broadcast-ownership rules that could affect certain restrictions under the separation agreement.

Important facts for investors to verify

  • Whether the provisional $174 million Tax Act charge, including its deferred-tax and deemed-repatriation components, changes as the company finalizes its estimates.
  • Whether digital real estate growth and cost savings can offset sustained advertising declines, particularly at News America Marketing and print publications.
  • Progress and final terms, if any, of the proposed Foxtel/FOX SPORTS Australia combination, and Foxtel’s operating performance and debt exposure.
  • Developments in Valassis, U.K. Newspaper Matters and tax proceedings, including indemnification recoveries and any liabilities not currently estimable.
  • Cash availability: $909 million was held by foreign subsidiaries, including $155 million held by separately listed REA Group and not readily accessible to News Corp without a REA dividend.