News Corporation — Form 10-Q Summary
Business context and reporting period
News Corporation is a diversified media and information-services company spanning news and information, book publishing, digital real estate, and Australian cable sports programming. This unaudited report covers the three months ended September 30, 2015, News Corp’s first quarter of fiscal 2016, compared with the three months ended September 30, 2014. Amounts are in U.S. dollars, millions, except per-share data.
During the quarter, management approved a plan to dispose of the Digital Education business. Its results are presented as discontinued operations in both periods. Fiscal 2016 results are not necessarily indicative of full-year results.
Key financial metrics
| Metric | Quarter ended Sep. 30, 2015 | Prior-year quarter |
|---|---|---|
| Revenue | $2,014 | $2,108 |
| Segment EBITDA (non-GAAP) | $165 | $194 |
| Segment EBITDA margin (calculated) | 8.2% | 9.2% |
| Income from continuing operations before tax | $52 | $156 |
| Income from continuing operations | $143 | $109 |
| Net income attributable to News Corp stockholders | $175 | $65 |
| Basic and diluted EPS | $0.30 | $0.11 |
| Operating cash flow from continuing operations | $141 | $220 |
| Free cash flow available to News Corp (non-GAAP) | $67 | $130 |
Revenue fell 4%. Advertising revenue declined 4% to $880 and circulation and subscription revenue fell 5% to $639; consumer revenue was broadly flat at $392. Segment EBITDA declined 15%. Higher reported continuing-operations income and EPS reflected tax benefits, not stronger pre-tax performance: the company recorded a $91 tax benefit versus $47 of tax expense a year earlier. Net income also included $46 from discontinued operations, compared with a $21 loss in the prior-year quarter.
At September 30, cash and cash equivalents were $1,898, versus $1,951 at June 30, 2015. Current assets were $3,889 and current liabilities $2,166 (calculated current ratio: about 1.8). Total assets were $14,756 and total equity $11,781. The balance sheet presents no borrowings line; the company reported that its $650 revolving credit facility was undrawn at filing and that it complied with facility covenants. The filing does not provide a clear consolidated total-debt figure.
Cash flow from continuing operations was $141; investing used $86, including $63 of capital expenditures; financing used $37, including $15 of share repurchases and $16 of dividends. Cash decreased to $1,898 after discontinued-operation cash use and foreign-exchange movements. The company’s non-GAAP free cash flow available to News Corp was $67, down from $130.
Material changes versus the prior comparable period
- News and Information Services revenue declined 11% to $1,290 and segment EBITDA fell 21% to $83. Management cited foreign-exchange impacts and weak Australian print advertising; expense reductions partially offset the revenue pressure.
- Book Publishing revenue rose 1% to $409, but EBITDA declined 24% to $42, reflecting title mix, lower contribution from the Divergent series, and an industry-wide e-book sales decline. Digital sales fell 12% and were 20% of consumer revenue.
- Digital Real Estate Services revenue increased 71% to $191, principally from the Move acquisition, but EBITDA was unchanged at $57. Move contributed $85 of quarterly revenue.
- Cable Network Programming revenue fell 11% to $124 and EBITDA fell 13% to $28, reflecting currency effects and higher sports-programming costs, including Rugby World Cup costs.
- Equity earnings from affiliates fell to $8 from $25, mainly because Foxtel’s earnings declined. Foxtel revenue fell 19% and net income fell to $42 from $81, with currency and programming costs among the factors cited.
- Other, net declined to $5 from $48; the prior-year quarter included a $29 gain on a securities sale and $17 of dividends from cost-method investments.
Outlook, management commentary, risks, and unusual items
- Management said it does not ordinarily provide projections of future operating results and undertook no obligation to update forward-looking statements. No specific earnings guidance was provided.
- The Digital Education disposal plan led to a $76 pre-tax, non-cash impairment charge and classification as discontinued operations. A $151 tax benefit on reclassification, together with other tax effects including a $106 release of valuation allowances, materially boosted reported earnings. Amplify Insight and Amplify Learning were sold on September 30 for no material gain or loss.
- Foreign-exchange movements weighed on reported revenue, expenses, segment results, cash flow, and comprehensive income. Other comprehensive loss was $450, primarily reflecting a $445 currency-translation loss; comprehensive loss attributable to News Corp stockholders was $268.
- The company acquired Checkout 51 for $13 cash at closing plus up to $28 in contingent consideration. It acquired Unruly for about $90 cash plus up to $86 in future contingent consideration. REA Group announced a proposed acquisition of the remaining iProperty shares for approximately A$500 million, primarily funded with new debt; completion was subject to approvals and other conditions.
- A six-year Australian Football League media-rights commitment for 2017–2022 is approximately $850 (A$1.2 billion).
- Key risks include continued advertising and print-market weakness, digital competition and changing consumer behavior, foreign-currency exposure, sports-rights costs, acquisition integration, cyber and data-security events, and legal proceedings. The company reported $119 accrued for U.K. Newspaper Matters, of which approximately $60 was expected to be indemnified by 21st Century Fox; potential additional claims and unindemnified fines remain uncertain. News America Marketing antitrust litigation and other legal matters also remain unresolved.
- In October 2015, the company amended its revolving facility, extending maturity to October 23, 2020 and reducing the commitment fee. As of filing, it had not drawn on the facility. The filing also describes risks to access to capital markets and restrictions on transferring some foreign cash to the U.S.
Most important facts for investors to verify
- How much of the increase in net income and EPS reflects tax benefits and discontinued operations, versus recurring operating performance.
- Whether advertising, especially Australian print advertising, and News and Information Services EBITDA stabilize, and how much reported performance is affected by currency.
- The final proceeds, costs, and remaining obligations from the Digital Education disposal, and the realizability of deferred tax assets.
- Integration and performance of Move, Checkout 51, and Unruly, plus funding and completion terms for REA Group’s proposed iProperty transaction.
- Future cash generation, the full debt position, use of the revolving facility, and capacity to fund the AFL rights commitment, acquisitions, dividends, and buybacks.
- Developments in U.K. Newspaper Matters and antitrust cases, including potential exposures beyond accrued amounts and the scope of 21st Century Fox indemnification.