News Corporation — FY2019 Form 10-K Summary
Period clarification: The supplied filing is the annual report for the fiscal year ended June 30, 2019 (52 weeks), filed August 13, 2019—not a report for calendar 2018 Q4. Unless stated otherwise, amounts are U.S. dollars.
Business context and reporting period
News Corp is a diversified media and information services company operating across News and Information Services, Subscription Video Services, Book Publishing, Digital Real Estate Services and Other. Its brands and businesses include Dow Jones and The Wall Street Journal, Foxtel, HarperCollins, REA Group and realtor.com.
Fiscal-year comparisons require care: News Corp began consolidating Foxtel in April 2018 after combining its interests in Foxtel and FOX SPORTS Australia with Telstra. Consequently, reported FY2018 includes only a partial period of consolidated Foxtel results. The filing also supplies unaudited FY2018 pro forma figures to improve comparability.
Financial performance and liquidity
| Metric | FY2019 | FY2018 | Change or context |
|---|---|---|---|
| Revenue | $10.074 billion | $9.024 billion reported; $10.564 billion pro forma | Up 12% reported; down 5% versus pro forma |
| Net income (loss) attributable to News Corp | $155 million | $(1.514) billion reported; $(1.114) billion pro forma | Improved, substantially reflecting the absence of prior-year impairments and transaction-related losses |
| Basic / diluted earnings per share | $0.27 / $0.26 | $(2.60) / $(2.60) reported | FY2019 returned to profit |
| Total Segment EBITDA | $1.244 billion | $1.071 billion reported; $1.443 billion pro forma | Up 16% reported; down 14% versus pro forma |
| Cash provided by operating activities | $928 million | $757 million | Up $171 million |
| Capital expenditures | $572 million | $364 million | Higher, including $302 million for Foxtel |
| Free cash flow available to News Corp | $213 million | $249 million | Down $36 million; company-defined non-GAAP measure |
| Cash and cash equivalents at year-end | $1.643 billion | $2.034 billion | Down $391 million |
| Total borrowings at year-end | $1.453 billion | $1.952 billion | Down $499 million |
Net income was $228 million before $73 million attributable to noncontrolling interests. FY2019 included $188 million of impairment and restructuring charges, including $96 million of non-cash impairments and $92 million of restructuring costs. Income tax expense was $126 million, a 36% effective rate. Segment EBITDA is a non-GAAP measure and excludes depreciation and amortization, impairments and restructuring, interest, equity-affiliate results, other items and taxes.
Year-end total current assets were $4.050 billion and current liabilities were $3.340 billion. The company had an undrawn $650 million corporate revolving credit facility and $181 million of undrawn Foxtel revolving commitments; it reported compliance with debt covenants. Of cash, $633 million was held by foreign subsidiaries, including $97 million held by separately listed REA Group and not readily accessible without a dividend declaration.
Material changes versus the prior comparable period
- Reported revenue growth mainly reflects the full-year consolidation of Foxtel; on a pro forma basis, revenue fell 5%, including a $418 million adverse foreign-exchange impact.
- On a pro forma basis, Subscription Video Services revenue declined 13% to $2.202 billion and Segment EBITDA fell 30% to $380 million. Lower broadcast subscribers and package mix, currency effects, higher sports rights costs and Kayo marketing weighed on results; Foxtel Now and Kayo revenue increased $46 million.
- News and Information Services revenue fell 3% to $4.956 billion, chiefly because of weaker print advertising, currency effects and a $61 million decline at News America Marketing. Segment EBITDA rose 5% to $417 million, supported by cost savings and Dow Jones.
- Book Publishing revenue was broadly flat at $1.754 billion; Segment EBITDA increased 6% to $253 million. Digital sales grew 7% and were 20% of consumer revenue.
- Digital Real Estate Services revenue rose 2% to $1.159 billion, while Segment EBITDA declined 4% to $384 million, including investment in Opcity. REA Group cited weak property listing volumes and said near-term improvement was not expected.
- Operating cash flow improved, but higher capital spending and acquisitions contributed to investing cash outflow of $677 million. Financing cash outflow was $610 million, including $1.116 billion of debt repayments, partly offset by $681 million of new borrowings.
Outlook, commentary, risks and contingencies
- Outlook: News Corp says it does not ordinarily make projections of future operating results. Foxtel capital expenditures in FY2020 were expected to be approximately 20% below FY2019; management also expected higher non-cash programming amortization in FY2020 following a change in programming amortization for certain entertainment content.
- Strategic review: The company was reviewing strategic options for News America Marketing, including a potential sale; it gave no assurance that a transaction or other change would result.
- Debt and commitments: $449 million of borrowings were scheduled to mature in FY2020. Foxtel’s debt included $281 million due in FY2020 and $337 million in FY2021; the filing says repayments were expected to be funded mainly through cash and refinancing. Total listed contractual commitments and obligations were $6.662 billion, including sports programming rights, leases and debt.
- Impairment exposure: Approximately $2.0 billion of goodwill was identified as at risk, with reporting-unit fair values only 0%–5% above carrying values. The company recorded $96 million of non-cash impairment charges in FY2019; changes in assumptions or operating performance could lead to further charges.
- Legal matters: Insignia Systems filed a new antitrust and business-tort complaint in July 2019 seeking treble damages and other relief; the company said it would defend the case. In the Valassis matter, some claims remained after a partial summary judgment; the filing does not provide a clear estimate of potential loss. For U.K. Newspaper Matters, News Corp accrued approximately $53 million and recorded a $49 million receivable from FOX under indemnification arrangements; additional claims and ultimate costs could not be estimated.
- Key operating and market risks: The filing highlights structural print advertising and circulation pressures; competition and subscriber losses in pay-TV; sports-rights costs and renewal risk; property-market weakness in Australia; foreign-exchange exposure; newsprint prices; cybersecurity and privacy regulation; and uncertainty around Brexit and digital-service taxation.
- Governance and controls: The Murdoch Family Trust held approximately 38.4% of Class B shares as of August 5, 2019, and the company describes potential conflicts involving directors and officers who also hold roles or interests in FOX. Management and the auditor reported effective internal control over financial reporting; the financial statements received an unqualified audit opinion.
Most important facts for investors to verify
- Use the FY2018 pro forma comparison when evaluating underlying performance, and separate Foxtel consolidation effects from organic growth.
- Track Foxtel subscriber trends, churn, package mix, streaming-service economics, sports-rights costs and near-term debt refinancing.
- Assess whether News Corp can offset print advertising declines, including through digital subscriptions and professional information products, and monitor the NAM strategic review and business trajectory.
- Review the assumptions supporting the approximately $2.0 billion of at-risk goodwill, especially Foxtel subscriber and churn forecasts and News segment advertising expectations.
- Confirm progress and potential exposure in the Insignia and Valassis litigation and U.K. Newspaper Matters, including the collectability of the FOX indemnification receivable.
- Assess cash availability and upcoming obligations alongside the $1.643 billion cash balance, foreign-held cash, FY2020 maturities and substantial contractual commitments.