News Corporation — FY2017 Form 10-K
Reporting period: Fiscal year ended June 30, 2017 (52 weeks; fiscal 2016 had 53 weeks). The company dates its financial statements June 30; FY2017 actually ended July 2, 2017. This is an annual filing, not a standalone FY2016 fourth-quarter report.
Business context
News Corp is a diversified media and information company operating in news and information services, book publishing, digital real estate, and Australian cable programming, plus corporate activities. Its five reporting segments are News and Information Services, Book Publishing, Digital Real Estate Services, Cable Network Programming, and Other. It also owns 50% of Foxtel, accounted for as an equity investment.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $8.139 billion | $8.292 billion |
| Segment EBITDA | $885 million | $684 million |
| Continuing-operations loss | $643 million | Income of $235 million |
| Net income (loss) attributable to News Corp stockholders | $(738) million | $179 million |
| Diluted loss (earnings) per share | $(1.27) | $0.30 |
| Cash from continuing operating activities | $499 million | $952 million |
| Free cash flow available to News Corp | $113 million | $610 million |
| Cash and cash equivalents at year-end | $2.016 billion | $1.832 billion |
| Total borrowings | $379 million | $372 million |
Segment EBITDA, a non-GAAP measure, was about 10.9% of revenue in FY2017. It excludes depreciation and amortization, impairment and restructuring charges, affiliate earnings or losses, interest, taxes, and other items; it should not be treated as GAAP operating profit or cash flow. Cash from continuing operations fell $453 million, chiefly reflecting settlement payments, the absence of the prior-year Zillow proceeds, higher restructuring payments, lower affiliate dividends, and higher tax payments. Free cash flow available to News Corp is also non-GAAP.
Year-end current assets were $3.815 billion and current liabilities $2.452 billion. The $379 million of borrowings included $368 million under REA Group’s revolving facility and $11 million of other obligations; $103 million was current. News Corp’s separate $650 million revolving credit facility was undrawn, and the company reported compliance with applicable covenants. Some cash is not readily available to the parent, including $276 million held by separately listed REA Group. Foxtel, not consolidated as company debt, had approximately $1.65 billion of indebtedness outstanding, excluding $740 million of shareholder loans.
Material changes and segment results
- Revenue declined 2% year over year. Advertising revenue fell 5% and circulation and subscription revenue fell 4%; real estate revenue increased 12%. The comparison was affected by the missing 53rd week, which reduced FY2017 revenue by approximately $112 million, and foreign currency movements, which reduced revenue by approximately $147 million.
- News and Information Services revenue declined 5% to $5.069 billion, while segment EBITDA rose to $414 million from $214 million. The EBITDA increase largely reflected the absence of the prior-year $280 million NAM settlement charge; underlying contributions at News Corp Australia, News UK, and Dow Jones were lower amid print advertising weakness.
- Book Publishing revenue was approximately flat at $1.636 billion; segment EBITDA increased 8% to $199 million, primarily reflecting title mix. Digital sales were 19% of consumer revenue.
- Digital Real Estate Services revenue increased 14% to $938 million, while segment EBITDA fell 6% to $324 million. Growth at REA Group and Move was partly offset by the absence of the prior-year $122 million Zillow settlement gain and increased marketing costs.
- Cable Network Programming revenue was $494 million and segment EBITDA was $123 million, broadly flat versus the prior year. The FY2017 results included Australian News Channel, acquired in December 2016.
- The company acquired Wireless Group and Australian Regional Media, sold REA Group’s European business for approximately $140 million and recorded a $107 million pre-tax gain, and acquired a 15% interest in India’s Elara through REA Group.
Outlook, management commentary, risks, and unusual items
- Management says it does not ordinarily provide projections of future operating results. The filing reports an expected annualized cost reduction of approximately $100 million from a Dow Jones reorganization by the end of fiscal 2018.
- Management reduced its outlook for the U.K. newspapers in FY2017 due to adverse print advertising and circulation trends. Accelerating print advertising declines in Australia also prompted asset impairments.
- FY2017 included $785 million of non-cash impairment charges, principally write-downs of newspaper fixed assets in the U.K. and Australia, plus $142 million of restructuring charges. The income statement reported $927 million of combined impairment and restructuring charges. A separate $227 million non-cash write-down of the Foxtel investment contributed to affiliate losses.
- Foxtel’s FY2017 revenue was $2.411 billion, net income $59 million, and EBITDA $568 million. Its net income was affected by losses relating to its investment in Ten Network Holdings and the cessation of Presto operations.
- Key risks include structural declines in print advertising and circulation, digital competition and advertising pricing, sports-rights renewal costs, foreign exchange exposure (including Brexit-related sterling weakness), economic and regulatory uncertainty, data privacy and cybersecurity, and impairment risk. Approximately $1.4 billion of goodwill and $1.2 billion of investments were identified as having less than a 3% fair-value cushion over carrying value.
- Legal exposures include pending Valassis antitrust proceedings and U.K. Newspaper Matters. The company accrued $132 million for U.K. claims and related costs, of which approximately $82 million was expected to be indemnified by 21st Century Fox. Management said the ultimate outcome and cost could not be predicted.
- The company paid $0.20 per share in dividends during FY2017. The board declared a further $0.10-per-share semiannual dividend in August 2017, payable in October 2017. REA Group’s July 2017 acquisition of an 80.3% interest in Smartline for approximately A$69 million was a subsequent event.
Important facts for investors to verify
- Whether recurring revenue and cash generation can stabilize as print advertising and circulation decline; assess FY2017 results separately from the prior year’s 53rd week and settlement-related comparatives.
- The extent to which FY2017 EBITDA improvement reflects durable operating performance rather than the absence of the prior-year NAM charge.
- Assumptions behind the newspaper and Foxtel impairment valuations, and whether further impairments or restructuring costs may arise.
- Availability of cash held by REA Group, REA facility maturities and covenant headroom, and Foxtel’s debt and shareholder-loan obligations.
- Potential cash and earnings effects of pending litigation, tax examinations, U.K. Newspaper Matters, and the company’s indemnification arrangements with 21st Century Fox.
- Progress on the stated Dow Jones cost savings and performance of acquisitions and investments, including Wireless Group, Move, Elara, and Smartline.