News Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended December 31, 2018 (fiscal 2019). Unaudited results are compared with the corresponding 2017 periods unless otherwise noted. News Corp is a global media and information-services company with News and Information Services, Subscription Video Services, Book Publishing, Digital Real Estate Services, and Other segments. Dollar amounts are in millions unless stated.
Key financial metrics
| Metric | Three months ended Dec. 31, 2018 | Six months ended Dec. 31, 2018 |
|---|---|---|
| Revenue | $2,627; up 21% reported | $5,151; up 22% reported |
| Income before tax | $174 | $352 |
| Net income | $119, versus loss of $66 | $247, versus $21 |
| Net income attributable to News Corp stockholders | $95, versus loss of $83 | $196, versus loss of $15 |
| Diluted earnings per share | $0.16, versus loss per share of $0.14 | $0.33, versus loss per share of $0.03 |
| Total Segment EBITDA (non-GAAP) | $370, versus $328 reported in 2017 | $728, versus $576 reported in 2017 |
| Net cash provided by operating activities | $358 for six months, versus $204 | |
| Capital expenditures | $264 for six months, versus $128 | |
| Cash and cash equivalents | $1,618 at Dec. 31, down from $2,034 at June 30 | |
| Total borrowings | $1,680 at Dec. 31, down from $1,952 at June 30 |
Reported Segment EBITDA margin was approximately 14.1% for both the quarter and six-month period. The comparison is affected by Foxtel’s consolidation. Against 2017 pro forma results that include Foxtel, revenue declined 2% for the quarter and 3% year to date; Segment EBITDA declined 18% and 12%, respectively. Pro forma EBITDA margins were approximately 16.7% and 15.6% in the 2017 periods.
Business context and material changes
- Reported revenue growth was driven mainly by the April 2018 Foxtel/FOX SPORTS Australia combination. Subscription Video Services contributed $446 million of the quarterly increase and $871 million of the six-month increase. The reported comparison therefore does not reflect like-for-like growth.
- On a pro forma basis, Subscription Video Services revenue fell 11% in the quarter and 14% year to date, primarily due to lower broadcast subscribers, package mix changes, foreign exchange, and lower advertising. Segment EBITDA fell 46% and 36%, respectively, with higher sports programming and production costs, including about $26 million related to Cricket Australia, and Kayo Sports launch marketing costs.
- News and Information Services revenue declined 3% for the quarter and 1% year to date, mainly from weakness in print advertising and foreign exchange. Its EBITDA fell 15% in the quarter but rose 10% for six months, reflecting lower costs and improved contributions from Dow Jones and News Corp Australia.
- Book Publishing revenue rose 6% for the quarter and 5% year to date; EBITDA rose 13% and 24%. Digital sales increased about 12% in both periods, particularly from downloadable audiobooks.
- Digital Real Estate Services revenue increased 7% in both periods. Move’s Opcity acquisition contributed to growth; REA Group cited price and product mix benefits, partly offset by foreign exchange and softer listing volumes.
Cash, debt, and liquidity
- Six-month operating cash flow of $358 million exceeded investing outflows of $409 million and financing outflows of $333 million. Cash declined by $384 million before a $32 million adverse exchange movement.
- Investing outflows included $264 million of capital expenditure, of which $139 million related to new Foxtel, and $185 million for acquisitions, primarily Opcity. Financing included $470 million of debt repayments, $263 million of new borrowings, and $81 million of dividends paid.
- Free cash flow available to News Corporation, a company-defined non-GAAP measure, was $26 million, up from $16 million. It excludes REA Group free cash flow and adds dividends received from REA Group.
- Cash less total borrowings implies net debt of approximately $62 million. This is a simple calculation; $42 million of cash held by separately listed REA Group was not readily accessible to News Corp.
- Management said available cash, future operating cash flow, and borrowing capacity were expected to support foreseeable needs. The company had an undrawn $650 million revolving facility, expandable to $900 million at its request, plus $306 million of undrawn Foxtel facilities. It reported compliance with debt covenants.
- About $351 million of Foxtel Group debt was scheduled to mature in fiscal 2019 and $365 million in fiscal 2020; management expected to fund Foxtel repayments primarily with new borrowings. REA Group had approximately $169 million due in December 2019 and expected to use cash on hand.
Outlook, risks, and unusual items
- The company said it does not ordinarily make projections of future operating results; no quantified company-wide guidance was provided.
- Management revised the outlook for a Subscription Video Services reporting unit after broadcast subscriber declines. Goodwill and an indefinite-lived tradename were identified as at risk for impairment; the reporting unit’s fair value exceeded carrying value by about 6%. The company identified approximately $2.3 billion of goodwill and indefinite-lived tradename assets at risk across two reporting units, including $2.1 billion in Subscription Video Services.
- Foreign exchange reduced reported revenue by $67 million in the quarter and $116 million for six months. Print advertising weakness, subscriber losses and shifts in package mix, sports-content costs, and softer Australian property listings were additional operating headwinds.
- Effective tax rates exceeded the U.S. statutory rate in 2018, primarily due to valuation allowances on certain foreign tax benefits and higher-tax foreign operations. The prior-year comparison included approximately $174 million of tax expense associated with the Tax Act, making earnings comparisons unusually favorable in 2018.
- News Corp adopted ASC 606 in fiscal 2019. The standard reduced reported revenue by $20 million for the quarter and $37 million for six months, with no material net-income effect described overall. Adoption also included a $20 million reduction to opening accumulated deficit. Prior periods were not restated.
- Opcity was acquired in October for approximately $210 million of total transaction value, including about $182 million cash net of acquired cash. Its preliminary allocation included $124 million of goodwill. The company also redeemed its $20 million preferred stock in July 2018.
- Legal matters include the Valassis antitrust litigation and U.K. Newspaper Matters. News Corp had accrued approximately $50 million for U.K. claims and costs, with a related $47 million indemnification receivable from 21st Century Fox. The company could not estimate potential losses for certain other matters; adverse outcomes could affect results and financial condition.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material changes to the risks in its latest Form 10-K.
Important facts for investors to verify
- Assess like-for-like Foxtel performance using the pro forma comparisons, especially subscriber trends, package mix, sports costs, and Kayo adoption.
- Monitor impairment testing assumptions and headroom for the identified at-risk goodwill and tradename assets.
- Review debt maturities, refinancing plans, and accessibility of cash held by foreign subsidiaries and REA Group.
- Separate recurring operating performance from the prior-year Tax Act comparison, foreign-exchange effects, and accounting-standard changes.
- Track print advertising trends, restructuring costs, Opcity’s contribution and compensation costs, and the outcome of significant legal and tax contingencies.