Business context and reporting period
News Corporation is a diversified media and information services company, with businesses in news and information, book publishing, digital real estate, and Australian cable and subscription video. This is its Form 10-Q for the quarter ended March 31, 2018—fiscal 2018 third quarter, despite the request metadata identifying 2017 Q3. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Key financial metrics
| Metric | Three months ended March 31, 2018 | Nine months ended March 31, 2018 |
|---|---|---|
| Revenue | $2,093; up 6% year over year | $6,331; up 4% |
| Net loss attributable to News Corp stockholders | $1,128; diluted loss per share $1.94 | $1,143; diluted loss per share $1.96 |
| Total Segment EBITDA (non-GAAP) | $182, versus $215 | $760, versus $670 |
| Operating cash flow, continuing operations | Not separately presented in the supplied filing text | $465, versus $224 |
| Capital expenditures | Not separately presented | $200, versus $168 |
| Cash and cash equivalents | — | $2,112 at March 31, 2018, versus $2,016 at June 30, 2017 |
| Borrowings | — | $184 non-current borrowings; $92 current portion of long-term debt |
- Nine-month revenue growth reflected higher digital real estate services revenue (+23%), book publishing (+3%) and cable network programming (+11%). Advertising revenue fell 3%, while circulation and subscription revenue rose 6%.
- Nine-month Segment EBITDA margin was approximately 12.0%, compared with 11.1% in the prior year period. Quarterly margin was approximately 8.7%, compared with 10.9%.
- Current assets were $3,986 million and current liabilities $2,467 million at March 31, 2018. The resulting current ratio was approximately 1.6.
- Cash provided by operations exceeded investing and financing outflows: continuing-operations investing cash use was $144 million and financing cash use was $234 million for the nine months. Cash increased by $87 million, including exchange movements.
- Free cash flow available to News Corporation, a non-GAAP measure, was $184 million, versus negative $19 million. The company calculates this after capital expenditures, excluding REA Group free cash flow and adding REA Group dividends received.
Material changes versus the prior comparable period
- The company recorded a $957 million non-cash write-down of its Foxtel investment, included in equity losses of affiliates. Total equity losses were $1,002 million for the nine months, versus $276 million.
- It also recorded $225 million of non-cash impairment charges, primarily for News America Marketing goodwill and intangible assets and FOX SPORTS Australia goodwill. Restructuring charges were $48 million for the nine months.
- These charges drove a $1,089 million consolidated net loss for the nine months, compared with a $219 million loss in the prior year period. The prior-year period included approximately $310 million of impairment charges, principally for Australian newspaper assets, and a $227 million Foxtel write-down.
- Digital Real Estate Services’ nine-month Segment EBITDA rose to $302 million from $237 million; Book Publishing increased to $173 million from $160 million. News and Information Services declined to $298 million from $311 million, while Cable Network Programming fell to $76 million from $99 million.
- Operating cash flow increased by $241 million year over year, mainly because the prior-year period included $256 million of NAM Group settlement payments. Capital spending and debt repayments were higher in the current period.
Outlook, management commentary, risks and unusual items
- Management said cash on hand, expected operating cash flow and potential capital-markets access should meet foreseeable liquidity needs, while noting that future financing access depends on performance, credit standing and market conditions. The company does not ordinarily provide projections of future operating results.
- Following the Foxtel impairment, management cited lower-than-expected revenue from new products and broadcast subscribers. Further shortfalls in expected Foxtel cash flows could lead to additional write-downs. Management also identified approximately $2.1 billion of goodwill in News and Information Services and Cable Network Programming reporting units as at risk of future impairment.
- In April 2018, News Corp and Telstra completed the combination of Foxtel and FOX SPORTS Australia. News Corp owns 65% of the combined company. Foxtel debt of approximately $1.7 billion was expected to be included in News Corp’s balance sheet beginning in fiscal Q4; purchase accounting was still being evaluated. A $322 million channel-distribution-agreement intangible asset was expected to be written off in the acquisition accounting.
- In May 2018, REA Group agreed to acquire Hometrack Australia for approximately A$130 million, subject to customary closing conditions, with part of the funding expected from debt.
- The Tax Act resulted in a provisional $174 million tax charge for the nine-month period. The company stated that its accounting remained subject to a measurement period and that the final impact could differ, possibly materially. An IRS audit of the fiscal 2014 federal return began in February 2018.
- Legal matters include ongoing Valassis antitrust litigation and U.K. newspaper claims. The company said it could not estimate potential losses for certain proceedings; approximately $59 million accrued for U.K. Newspaper Matters was matched by a receivable from 21st Century Fox under an indemnification agreement.
- The company reported compliance with its and REA Group’s applicable debt covenants. Its $650 million corporate revolving facility was undrawn as of the filing, and the company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the filing period: this report covers fiscal Q3 2018, ended March 31, 2018, not 2017 Q3.
- Assess whether Foxtel’s outlook and the combined subscription-video business support the carrying values and whether further impairment or purchase-accounting charges arise.
- Track performance and impairment risk at News America Marketing and other identified reporting units, including trends in print advertising and circulation.
- Reconcile reported GAAP losses with non-GAAP Segment EBITDA and free cash flow available to News Corp; review the non-cash nature and drivers of major charges.
- Monitor the inclusion of Foxtel’s approximately $1.7 billion debt, REA Group borrowings, Hometrack acquisition funding, and cash accessibility—particularly cash held by separately listed REA Group.
- Follow final Tax Act accounting and the outcomes or developments in Valassis, U.K. Newspaper Matters, and tax examinations.