Business context and reporting period
News Corporation’s unaudited Form 10-Q covers its first quarter of fiscal 2021, the three months ended September 30, 2020, compared with the three months ended September 30, 2019. The company operates digital real estate, subscription video, Dow Jones, book publishing and news media businesses, plus corporate activities. Prior-period segment information was recast to report Dow Jones separately.
Financial performance and position
| Metric | Quarter ended September 30, 2020 | Prior-year quarter |
|---|---|---|
| Revenue | $2.117 billion | $2.340 billion |
| Net income (loss) | $47 million | $(211) million |
| Net income (loss) attributable to News Corp shareholders | $34 million; $0.06 per share | $(227) million; $(0.39) per share |
| Net cash from operating activities | $155 million | $27 million |
| Capital expenditures | $93 million | $117 million |
| Cash and cash equivalents at period-end | $1.539 billion | $1.441 billion |
| Total borrowings, including current portion and finance leases | $1.284 billion | $1.259 billion at June 30, 2020 |
Total Segment EBITDA, a non-GAAP measure, was $268 million versus $221 million; its approximate margin was 12.7% versus 9.4% of revenue. The filing does not present a consolidated operating margin. Pretax income was $72 million, with $25 million of income tax expense. Free cash flow available to News Corporation, a company-defined non-GAAP measure, was $65 million versus $(83) million.
Period-end total current assets were $3.435 billion and current liabilities were $2.738 billion. Borrowings are principally at Foxtel and REA Group and are non-recourse to News Corp. The company also had an undrawn $750 million corporate revolving credit facility; it reported compliance with debt covenants.
Material changes versus the prior comparable period
- Revenue declined 10%, chiefly reflecting the $200 million year-over-year impact of the News America Marketing sale and continued weakness in print advertising. Advertising revenue fell 45%; circulation and subscription revenue rose 1%.
- Net income improved by $258 million, primarily because the prior-year quarter included $273 million of non-cash impairment charges, mainly related to News America Marketing. Current-quarter impairment and restructuring charges were $40 million, including $40 million of restructuring charges.
- Digital Real Estate Services, Dow Jones and Book Publishing increased Segment EBITDA to $119 million, $72 million and $71 million, respectively. Subscription Video Services EBITDA was $78 million; News Media recorded a $22 million EBITDA loss, compared with $7 million of EBITDA in the prior-year quarter.
- Operating cash flow increased by $128 million, attributed mainly to higher Segment EBITDA and lower working capital. Cash increased $22 million from June 30, 2020.
Outlook, commentary, risks and unusual items
- The company does not ordinarily provide projections of future operating results and gave no specific financial guidance in the filing. Management said cash on hand, expected operating cash flow and available credit should meet liquidity needs for at least the next 12 months, while noting that COVID-19 could affect operations and access to financing.
- COVID-19 continued to pressure print advertising, print circulation and commercial video subscriptions. Management reported stronger U.S. real estate consumer traffic and leads, ongoing digital subscriber and audience growth, and a gradual recovery in commercial video subscribers. Approximately $36 million of sports programming rights and production costs were recognized in the quarter following event deferrals from fiscal 2020.
- Digital subscriber growth supported Dow Jones: average daily Wall Street Journal digital-only subscriptions rose 27% to 2.354 million. Book Publishing revenue increased 13%, supported by title performance and digital sales. Foxtel’s total paid subscribers were 3.287 million, including 644,000 paid Kayo subscribers and 290,000 paid Binge subscribers.
- News Corp Australia’s closure or digital transition of regional and community newspapers is expected to reduce fiscal 2021 revenue by approximately $111 million, with an immaterial impact on Segment EBITDA. The planned Bronx print plant closure and move to third-party printing generated restructuring charges; the transition was expected in the third quarter of fiscal 2021.
- In October 2020, REA Group agreed to increase its ownership in Elara; completion was subject to due diligence and other conditions and was anticipated in fiscal 2021’s second quarter. News Corp also planned a separate cash investment. The transaction could change consolidation and reported results.
- Contingencies include antitrust litigation relating to the former News America Marketing business and U.K. Newspaper Matters. The company accrued approximately $54 million for U.K. claims and costs and recorded a related approximately $61 million receivable from Fox Corporation; additional exposure could not be estimated. The filing also describes a new regulatory risk: FCC media-ownership rules, then subject to U.S. Supreme Court review, and separation-agreement restrictions may constrain certain U.S. acquisitions.
- The company declared a semi-annual dividend of $0.10 per share, paid October 14, 2020. Future dividends remain at the board’s discretion. Most cash held at REA Group is not directly accessible to News Corp without a dividend declaration.
Important facts for investors to verify
- Whether advertising-market weakness and COVID-19 effects persist, especially in News Media and commercial video, and how quickly subscriber and advertising trends recover.
- Whether Segment EBITDA gains reflect durable operating improvements or temporary cost reductions, deferred marketing and other timing effects.
- Progress on the Bronx plant closure, Australian regional newspaper transition, and the expected revenue and cost effects.
- Debt maturities, subsidiary-level covenant headroom and liquidity access, including the non-recourse nature of Foxtel and REA Group debt and restrictions on accessing foreign cash.
- Developments in the Insignia and Valassis cases, U.K. Newspaper Matters and related Fox indemnification, as well as the Elara transaction and FCC ownership-rule review.