NEWS CORP quarterly report, Q1 FY2017

Business context and reporting period

News Corporation’s Form 10-Q covers its first quarter of fiscal 2017: the three months ended September 30, 2016 (the company notes the underlying quarter ended October 2, 2016). This is not calendar 2016 Q1. The diversified media and information services company reports five segments: News and Information Services, Book Publishing, Digital Real Estate Services, Cable Network Programming, and Other. Digital Education is reported as discontinued operations.

Key financial results

Unless noted, amounts are in millions of U.S. dollars. Comparable period is the three months ended September 30, 2015.

Total Segment EBITDA margin was approximately 6.6%, versus 8.2% in the prior-year quarter. Segment EBITDA is a non-GAAP measure and excludes, among other items, depreciation and amortization, restructuring, equity affiliate results, interest and taxes.

Balance sheet, liquidity and debt

At September 30, 2016, cash and cash equivalents were $1,499 million, total assets $15,269 million, current assets $3,328 million and current liabilities $2,287 million. Total borrowings were $381 million, including $377 million long-term; the company therefore had approximately $1,118 million of cash in excess of borrowings. Equity totaled $11,746 million. Cash declined from $1,832 million at June 30; restricted cash of $315 million held for the Wireless Group acquisition was used, so no restricted cash remained at quarter-end.

REA Group had drawn the full A$480 million revolving facility to fund its iProperty acquisition; it reported covenant compliance and paid approximately $3 million interest in the quarter. News Corp’s separate $650 million unsecured revolving facility was undrawn, with commitments through October 2020. News Corp reported compliance with its facility covenants. Management said cash on hand, expected operating cash generation and potential capital-markets access should meet foreseeable liquidity needs, while noting financing access depends on performance and market conditions. $670 million of cash was held by foreign subsidiaries, including $78 million at separately listed REA Group and not readily accessible to News Corp.

Changes versus the prior-year quarter

• Revenue fell $49 million, or 2%. Advertising declined $65 million (9%); circulation and subscription revenue fell $18 million (3%). Real estate revenue rose $27 million (19%), and other revenue rose $25 million (24%). Foreign exchange reduced revenue by $36 million.
• News and Information Services revenue fell $68 million and Segment EBITDA fell $37 million to $46 million, principally reflecting weaker print advertising. Book Publishing revenue decreased $20 million, while EBITDA rose $6 million to $48 million. Digital Real Estate Services revenue and EBITDA increased 18% each, to $226 million and $67 million. Cable Network Programming revenue rose $4 million, but EBITDA halved to $14 million due mainly to sports rights costs.
• Operating cash flow declined by $409 million, principally because of the $250 million News America Marketing antitrust settlement payment placed in escrow, working-capital timing and lower Segment EBITDA.
• Prior-year earnings included a $106 million tax benefit from release of valuation allowances and $46 million income from discontinued operations, including a substantial tax benefit. These did not recur, contributing to the sharp year-over-year decline in reported earnings.

Outlook, commentary, risks and unusual items

• The company does not ordinarily provide projections of future operating results. It expects approximately $50–$60 million of additional Dow Jones restructuring charges during the remainder of fiscal 2017; the reorganization is expected to generate approximately $100 million of annualized cost savings by the end of fiscal 2018.
• Wireless Group was acquired in September for approximately $285 million cash plus $23 million assumed debt, which was repaid after closing. The preliminary allocation included approximately $193 million of acquired intangible assets and $149 million of goodwill. The acquisition broadens U.K. and Irish radio operations; final fair-value estimates may change.
• Foxtel’s results included a $21 million loss following the decision to cease Presto operations in January 2017. News Corp’s equity-method loss from affiliates was $15 million, compared with $8 million of earnings a year earlier.
• The News America Marketing settlement was approximately $250 million; it was approved by the court on October 31, 2016, after quarter-end. Related claims of approximately $30 million had been settled in February 2016. Valassis antitrust proceedings remained unresolved; an expert panel recommended denying a motion to dismiss, with further proceedings scheduled.
• For U.K. Newspaper Matters, the company accrued approximately $101 million for filed claims and costs, with approximately $58 million expected to be indemnified by 21st Century Fox. The company said additional claims and ultimate costs cannot be estimated. It also disclosed potential joint tax liability relating to pre-separation periods, subject to a 21st Century Fox indemnity.
• Key business exposures include continued weakness and structural change in print advertising, currency movements, paper costs, changing consumer preferences, competition, and variable book-release and sports-programming schedules. The company does not hedge translation exposure in its Australian and U.K. operations. It reported no material change to previously disclosed risk factors.

Important facts for investors to verify

• Confirm the reporting-period label: this is fiscal Q1 2017, ended September 30, 2016, rather than calendar 2016 Q1.
• Assess recurring earnings separately from prior-year tax benefits and discontinued-operation results, and review the drivers of lower Segment EBITDA.
• Track operating cash flow and working capital after the one-time settlement payment; the quarter’s free cash flow available to News Corp was negative $317 million.
• Review the final Wireless Group purchase-price allocation and the performance and debt position of REA Group following iProperty.
• Monitor the Dow Jones restructuring charges and whether the stated annualized savings target is achieved.
• Follow the Valassis proceedings, U.K. Newspaper Matters liabilities and indemnification, and any other material legal or tax developments.