News Corporation — Form 10-Q Summary
Reporting period: Three months ended September 30, 2017, the first quarter of fiscal 2018. The filing compares results with the three months ended September 30, 2016. Amounts are in U.S. dollars unless noted.
Business context
News Corp is a diversified media and information services company with five reported segments: News and Information Services, Book Publishing, Digital Real Estate Services, Cable Network Programming, and Other. Its businesses include publishing, digital real estate services, and Australian cable and pay-TV interests.
Financial performance
| Metric | Q1 FY2018 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $2.058 billion | $1.965 billion | Up $93 million (5%) |
| Segment EBITDA | $249 million | $130 million | Up $119 million (92%) |
| Income before tax | $141 million | Loss of $1 million | Improved $142 million |
| Income tax expense | $54 million | Benefit of $1 million | |
| Net income attributable to News Corp stockholders | $68 million | Loss of $15 million | Improved $83 million |
| Diluted earnings per share | $0.12 | Loss of $0.03 | |
| Operating cash flow, continuing operations | Use of $4 million | Use of $268 million | Improved $264 million |
| Free cash flow available to News Corp | Use of $60 million | Use of $317 million | Improved $257 million |
Segment EBITDA margin was approximately 12.1% of revenue, compared with 6.6% in the prior-year quarter. Segment EBITDA is a non-GAAP measure and is not a substitute for GAAP results or cash flow.
Revenue growth was led by Digital Real Estate Services, up 20% to $271 million, and Cable Network Programming, up 13% to $145 million. News and Information Services revenue rose 2% to $1.241 billion; Book Publishing revenue rose 3% to $401 million. Segment EBITDA increased in each of these four segments.
Liquidity, debt, and cash flows
- Cash and cash equivalents were $1.877 billion at September 30, 2017, down from $2.016 billion at June 30, 2017. Current assets were $3.768 billion and current liabilities were $2.417 billion.
- Borrowings comprised $105 million of current debt and $281 million of non-current borrowings, or $386 million in total. News Corp had not drawn on its $650 million revolving credit facility and was in compliance with applicable covenants.
- Investing activities used $121 million, including $62 million of capital expenditures and $54 million for acquisitions, primarily Smartline. Financing activities used $31 million, including $21 million of dividends paid.
- Cash declined by $156 million during the quarter. The company reported $932 million of cash at foreign subsidiaries; $197 million was held by separately listed REA Group and was not readily accessible to News Corp.
Material changes, outlook, and risks
- Revenue increased 5%, with reported foreign-exchange effects adding $26 million. Acquisitions, including ARM and Wireless Group, contributed to News and Information Services growth; Smartline supported Digital Real Estate Services.
- Operating costs and SG&A were lower year over year. SG&A included a $46 million benefit from reversing part of the U.K. Newspaper Matters liability and matching receivable from 21st Century Fox after an agreement with a tax authority. The company reported a $63 million accrued liability for those matters, of which approximately $59 million was expected to be indemnified.
- Management gave no earnings projections and said it does not ordinarily make projections of future operating results. It stated that cash, expected operating cash flows, and potential capital-market access should support foreseeable liquidity needs, while noting that financing access depends on company performance and market conditions.
- In August 2017, News Corp and Telstra announced a non-binding proposal to combine their Foxtel interests with News Corp’s FOX SPORTS Australia interest. The contemplated ownership was 65% News Corp and 35% Telstra; the proposal remained subject to definitive agreements, regulatory review, and other conditions.
- Risks include uncertain outcomes and potentially adverse costs or reputational effects from litigation, including Valassis and U.K. Newspaper Matters; tax examinations and valuation allowances on certain foreign deferred tax assets; foreign-exchange exposure, which the company does not hedge for translation risk; and Australian media regulation.
- News Corp acquired an 80.3% interest in Smartline for approximately $55 million and recognized a $12 million liability related to the minority interest’s potential future sale or redemption. The filing notes that acquisition valuations remain preliminary.
Most important facts for investors to verify
- Whether the sharp year-over-year Segment EBITDA improvement is repeatable, given acquisition contributions, cost savings, and the U.K. Newspaper Matters benefit.
- Underlying trends in print advertising, circulation, digital subscriptions, and News America Marketing, including the effects of currency movements and acquisitions.
- The status and final terms of the proposed Foxtel/FOX SPORTS Australia combination and the Smartline acquisition valuation and minority-interest arrangements.
- Potential cash and earnings exposure from litigation, tax matters, and the company’s dependence on indemnification from 21st Century Fox for specified U.K. Newspaper Matters.
- Cash generation and access to foreign-held funds, including REA Group cash, alongside debt maturities and compliance with credit-facility covenants.