News Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2015; comparative periods ended March 31, 2014. The filing covers fiscal 2015 Q3, which differs from the request metadata’s “2014 Q3.” Unless otherwise stated, amounts are U.S. dollars in millions.
Business context
News Corp is a diversified media and information services company operating in news and information, book publishing, Australian cable sports, digital real estate, digital education and other activities. Its six reportable segments include Digital Education, presented separately from fiscal 2014; comparative segment information was recast.
Financial performance and liquidity
| Metric | Three months ended Mar. 31, 2015 | Prior-year quarter | Nine months ended Mar. 31, 2015 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $2,062 | $2,078 | $6,492 | $6,388 |
| Total Segment EBITDA | $163 | $175 | $661 | $643 |
| Net income | $34 | $61 | $285 | $265 |
| Net income attributable to News Corp | $23 | $48 | $231 | $226 |
| EPS, basic and diluted | $0.04 | $0.08 | $0.40 | $0.39 |
Quarterly revenue declined 1%; nine-month revenue rose 2%. Segment EBITDA margin, calculated as Segment EBITDA divided by revenue, was approximately 7.9% for the quarter (8.4% prior year) and 10.2% for the nine months (10.1% prior year). Segment EBITDA is a non-GAAP measure and excludes, among other items, depreciation and restructuring.
- Revenue mix and drivers: Advertising revenue fell 5% in the quarter and 4% year to date; circulation and subscription declined 2% and 1%. Consumer revenue increased 13% and 19%, respectively, with acquisitions contributing to growth.
- Profit: Quarterly attributable earnings fell 52%, mainly reflecting higher tax expense and lower affiliate earnings. Nine-month attributable earnings increased 2%; higher Segment EBITDA and lower restructuring and depreciation costs were partly offset by higher tax expense.
- Cash flow: Nine-month operating cash flow was $702, down from $803. Capital expenditures were $268, and free cash flow available to News Corp, a company-defined non-GAAP measure, was $391 versus $496. Investing cash outflow was $1,563, including $1,188 for acquisitions; financing cash outflow was $160.
- Liquidity and debt: Cash and equivalents were $2,027 at March 31, down from $3,145 at June 30, 2014. Current assets were $4,088 and current liabilities $2,273. The company reported an undrawn $650 revolving credit facility, expandable to $900; it was covenant-compliant. Move’s assumed $129 debt was repaid after acquisition. The filing does not provide a clear consolidated total-debt figure in the financial information summarized here.
- Comprehensive income: Despite net income, News Corp stockholders recorded comprehensive losses of $270 for the quarter and $933 for the nine months, largely due to foreign currency translation losses of $315 and $1,245, respectively.
Material changes and segment trends
- News and Information Services: Nine-month revenue declined 6% to $4,327 and EBITDA declined 19% to $434, driven by weaker print advertising, currency effects and lower circulation/subscription revenue. Quarterly EBITDA fell 23%.
- Book Publishing: Nine-month revenue increased 19% to $1,277 and EBITDA increased 15% to $188, primarily reflecting the Harlequin acquisition. Lower sales of the Divergent series partly offset growth.
- Digital Real Estate Services: Nine-month revenue rose 48% to $436, principally due to Move, acquired in November 2014, and growth at REA Group. EBITDA rose 3% to $156; Move generated acquisition-related losses and costs.
- Digital Education: Nine-month revenue increased 21% to $85; EBITDA loss narrowed to $69 from $140. Improvement included capitalized software development costs, so reported EBITDA benefited from capitalization.
- Other segments: Cable Network Programming nine-month revenue and EBITDA increased 3% and 4%, respectively. Other-segment losses narrowed, partly due to lower U.K. Newspaper Matters costs.
- Acquisitions and investments: News Corp acquired Harlequin for $414 net cash and Move, with total transaction value of $952. REA Group acquired an approximately 19.9% stake in iProperty; the company also agreed, subject to regulatory approval, to increase its APN News and Media stake to 14.99% for about $70.
Outlook, commentary, risks and unusual items
- The company stated it does not ordinarily provide projections of future operating results. It expected to invest approximately $230 in cash in Digital Education for the year ending June 30, 2015, including about $50 of deferred compensation paid in Q3.
- Management expected cash on hand, operating cash flow and available financing to meet foreseeable liquidity needs, while noting capital-market access depends on company performance, credit standing and market conditions. The company had no credit rating, according to the risk disclosures.
- Foreign exchange materially affected reported results; the company does not hedge translation exposure on Australian and U.K. net assets. Management estimated that a one-cent exchange-rate change could affect annual revenue by about $24 for each of the Australian dollar and pound sterling.
- U.K. newspaper investigations and civil litigation remain a contingency. The DOJ notified the company in January 2015 that it would not prosecute News Corp or 21st Century Fox. At March 31, the company accrued $111 for claims and costs, of which approximately $52 was expected to be indemnified by 21st Century Fox. Potential additional losses, including non-indemnified fines, could not be estimated.
- Other material risks include continued print-advertising pressure, changing media consumption, execution and impairment risks from acquisitions, uncertainty over Digital Education profitability and funding, sports-rights costs, cybersecurity, and legal or regulatory exposure. The filing identified News and Information Services and Digital Education goodwill as at risk for possible future impairment.
- The prior-year nine-month comparison included a foreign tax refund and matching payable to 21st Century Fox: a $721 tax benefit and a $721 expense in Other, net, with no net income-statement effect. This unusual item makes some year-over-year tax and other-income comparisons less informative.
- A Delaware stockholder-rights litigation was dismissed in full on April 7, 2015. The company also disclosed ongoing antitrust matters involving News America Marketing and unresolved HarperCollins proceedings in Canada.
Important facts for investors to verify
- Confirm the intended period: this filing is for fiscal Q3 2015, not fiscal Q3 2014.
- Assess whether core advertising and circulation declines, particularly in News and Information Services, are continuing and how much reported growth depends on acquisitions and foreign exchange.
- Review cash conversion and the causes of lower operating cash flow and free cash flow, alongside acquisition spending and the reduced cash balance.
- Track Move’s integration, profitability and goodwill valuation; also assess Harlequin’s contribution to publishing growth.
- Evaluate Digital Education’s cash investment and losses, including the impact of capitalized software costs on reported EBITDA.
- Monitor U.K. Newspaper Matters liabilities and indemnification recoveries, as well as the outstanding antitrust and tax contingencies.