NEWS CORP quarterly report, Q3 FY2016

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Business context and reporting period

News Corporation’s filing covers the quarter ended March 31, 2016 (the three months ended March 27) and the nine months ended March 31, 2016, compared with the corresponding 2015 periods. This differs from the request metadata, which says “2015 Q3.” Unless otherwise noted, amounts are in millions of U.S. dollars.

The company operates News and Information Services, Book Publishing, Digital Real Estate Services, Cable Network Programming and Other. Digital Education was classified as discontinued operations following a plan to dispose of the business.

Financial performance and position

  • Revenue: Q3 revenue was $1.891 billion, down 7% from $2.041 billion. Nine-month revenue was $6.066 billion, down 5% from $6.407 billion. Advertising was the largest pressure: down 10% in Q3 and 7% year to date.
  • Profit and per-share results: Q3 continuing operations reported a $128 million loss; net loss attributable to News Corp stockholders was $149 million, or $0.26 per share, versus income of $23 million, or $0.04 per share, a year earlier. Nine-month stockholder income was $89 million, or $0.15 per share, versus $231 million, or $0.40 per share.
  • Segment EBITDA: The company’s non-GAAP measure was negative $122 million in Q3 versus positive $184 million, principally reflecting the $280 million NAM Group settlement charge. Nine-month Segment EBITDA was $323 million, down 56% from $730 million. News and Information Services generated $54 million year to date, versus $434 million; Digital Real Estate Services rose to $169 million from $156 million.
  • Cash flow: Nine-month continuing operating cash flow was $589 million, down from $826 million. Capital expenditures were $180 million. Free cash flow available to News Corporation, a non-GAAP measure, was $362 million versus $565 million.
  • Liquidity and debt: Cash and equivalents were $1.972 billion at March 31, compared with $1.951 billion at June 30, 2015. Current assets were $3.905 billion and current liabilities $2.648 billion. Debt was $369 million, all long-term, primarily REA Group borrowings used to finance the iProperty acquisition; the company’s separate $650 million revolving facility remained undrawn. The company and REA Group reported compliance with applicable debt covenants.
  • Other balance-sheet items: Total assets were $15.716 billion, up from $15.035 billion at June 30, 2015. Goodwill rose to $3.681 billion from $3.063 billion, primarily reflecting acquisitions. Shareholders’ equity was $11.646 billion, down from $11.945 billion.

Material changes versus the prior comparable period

  • Q3 and nine-month results included a $280 million charge for settlement of NAM Group litigation and related claims. The settlement was subject to court approval.
  • News and Information Services revenue fell 9% in both Q3 and the nine-month period, amid weaker print advertising, lower free-standing insert revenue and foreign-exchange effects. Book Publishing revenue declined 11% in Q3 and 5% year to date, reflecting prior-year bestseller comparisons and lower industry e-book sales.
  • Digital Real Estate Services revenue increased 14% in Q3 and 36% year to date, aided by Move and higher REA Group revenues. Cable Network Programming revenue fell 8% in Q3 and year to date; nine-month Segment EBITDA declined 11%.
  • Foreign currency movements reduced reported revenue and segment results across several international businesses. Foxtel’s nine-month revenue fell 13%, with currency effects more than offsetting local-currency revenue growth.
  • Cash used for investing decreased to $703 million from $1.513 billion, largely because prior-year acquisitions were larger. Fiscal 2016 acquisitions included iProperty, Unruly, DIAKRIT and Checkout 51. REA Group acquired approximately 86.9% of iProperty and drew about $340 million under a revolving facility.

Outlook, commentary, risks and unusual items

  • Management said it does not ordinarily provide projections of future operating results. It expected fiscal 2016 capital expenditures of $240 million to $260 million.
  • The company cited continuing pressure on print advertising and circulation, competition and changing consumer behavior, foreign-exchange exposure, and the cost and renewal of sports programming rights among key business risks.
  • Committed Australian sports rights include approximately $775 million for National Rugby League rights from 2018–2022 and approximately $850 million for Australian Football League rights from 2017–2022.
  • Digital Education generated a nine-month pre-tax noncash impairment charge of $76 million and $17 million of severance and lease-termination costs. Tax benefits, including a $144 million benefit on reclassification to discontinued operations, contributed to reported discontinued-operations income of $20 million for the nine months.
  • The NAM settlement consisted of approximately $250 million for plaintiffs and attorneys plus approximately $30 million for related claims. The filing reported a $107 million tax benefit associated with the litigation settlement.
  • U.K. Newspaper Matters remained contingent: accrued liabilities were approximately $108 million, of which approximately $59 million was expected to be indemnified by 21st Century Fox. The company said the ultimate outcome and cost of additional claims could not be estimated.
  • Other risks include unresolved HarperCollins matters before the Canadian Competition Tribunal and Valassis antitrust claims referred to an Antitrust Expert Panel. Management stated that it could not predict their ultimate outcomes or costs.
  • Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

  • Confirm the intended reporting period: the supplied filing is for fiscal 2016 Q3, not 2015 Q3.
  • Track approval and payment of the NAM settlement, and assess the extent to which the $280 million charge and related tax benefit affect comparability.
  • Review underlying operating trends apart from currency effects and acquisitions, especially advertising, free-standing inserts, print circulation and e-book sales.
  • Assess cash generation and liquidity, including the decline in operating cash flow and the debt associated with iProperty.
  • Monitor Digital Education disposal progress and the use of tax assets, as well as developments in U.K. Newspaper Matters, Valassis and other legal contingencies.
  • Evaluate acquisition integration, goodwill growth and the economics of new sports-rights commitments.