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News Corporation (NWSA) Q3 Earnings Beat Estimates, Fall Y/Y

Zacks Equity Research

News Corporation NWSA came out with third-quarter fiscal 2020, wherein revenues missed the Zacks Consensus Estimate for the fifth quarter in row but earnings beat the same for the second straight time. We note that both the top and bottom lines declined year over year. Management highlighted that in spite of the coronavirus outbreak and foreign currency headwinds “profitability was relatively stable.” Profitability improved significantly at the News and Information Services segment courtesy of digital advertising and subscriber growth at Dow Jones.

Moreover, as part of its effort to simplify the operating structure, the company concluded the sale of News America Marketing to Charlesbank Capital Partners on May 5. The company’s restructure optimization plan also includes the strategic review of Australian newspaper holdings. Also, it will continue to focus on enhancing digitization.

Looking ahead, management cautioned that COVID-19 crisis will have a significant impact on the company’s fourth-quarter results as containment measures in a number of its operating geographies have been extended into May or beyond. To mitigate the impact of same, the company is undertaking cost-cutting measures such as lowering headcounts, trimming non-essential capital expenditures and curbing discretionary spending. It is also transitioning certain newspaper operations to digital-only.

We note that shares of this Zacks Rank #3 (Hold) company have fallen 29.9% in the past three months compared with the industry’s decline of 39.4%.

News Corporation Price, Consensus and EPS Surprise

News Corporation Price, Consensus and EPS Surprise

News Corporation price-consensus-eps-surprise-chart | News Corporation Quote

Quarterly Detail

News Corporation delivered adjusted earnings of 3 cents a share that came a penny ahead of the Zacks Consensus Estimate. However, earnings declined 25% from the year-ago quarter. Total revenues of $2,266 million declined 8% from the year-ago quarter, and also fell short of the Zacks Consensus Estimate of $2,308.7 million. The year-over-year decline in revenues can be attributed to a $78-million adverse impact of currency fluctuations, fall in subscription revenues at Foxtel and lower print-related advertising revenues at the News and Information Services segment.

Excluding the impact of acquisitions, divestitures and foreign currency fluctuations, adjusted revenues of $2,340 million fell 4% year over year.

While advertising revenues slumped 14% to $576 million, circulation and subscription revenues fell 6% to $966 million. Consumer revenues also declined 2% to $396 million, while revenues from real estate were down 4% to $209 million. Meanwhile, other revenues plunged nearly 16% to $119 million.

Total segment EBITDA came in at $242 million, reflecting a decline of 2% from the prior-year period. However, adjusted total segment EBITDA inched up 1% to $261 million.

Segmental Details

Revenues at the News and Information Services segment declined 8% year over year to $1,130 million in the reported quarter. Foreign currency fluctuations primarily hurt the segment’s revenues by 2%. While revenues rose 5% at Dow Jones, it fell 16%, 14% and 9% at News America Marketing, News Corp Australia and News UK, respectively. Adjusted revenues for the segment declined 5%, while adjusted EBITDA increased 4%.

Advertising revenues fell 14% year over year owing to softness in the print advertising market, lower revenues at News America Marketing, adverse foreign currency fluctuations and negative impact from the pandemic. The decrease was somewhat offset by digital advertising growth. Advertising revenues at Dow Jones slid 2% due to an 18% decrease in print advertising, partially offset by 25% surge in digital advertising revenues.

Circulation and subscription revenues inched up 1% owing to strong contribution from Dow Jones’ consumer products, which witnessed nearly 4% growth in circulation revenues. Notably, circulation revenues reflect a rise of 20% in digital paid subscriber and subscription price increase. Moreover, revenues at Dow Jones’ Professional Information Business increased 5%, gaining from higher revenues from content licensing partnerships and 18% surge in its Risk & Compliance products. Higher prices and rise in digital subscribers at other mastheads also drove results. These were largely offset by fall in print volume and adverse foreign currency fluctuations.

Digital revenues accounted for 36% of the News and Information Services segment revenues compared with 31% in the year-ago period. The Wall Street Journal’s average daily digital subscribers in the three months ended Mar 31, 2020 were 2,041,000 compared with 1,775,000 in the prior year. The Times and Sunday Times closing digital subscribers as of Mar 31, 2020 were 345,000 compared with 286,000 in the prior year.

The Subscription Video Services segment’s revenues came in at $462 million, down 14% year over year on account of lower broadcast subscribers and adverse foreign currency fluctuations. This was partly mitigated by improved revenues from Kayo. Adjusted revenues for the segment declined 7%, while adjusted EBITDA plunged 24%.

Foxtel’s total closing subscribers reached roughly 2.933 million as of Mar 31, 2020, exhibiting an improvement of 1% from last year on account of subscriber growth at Kayo. This was partly offset by fall in broadcast subscribers. Broadcast subscriber churn was 17.5% in the quarter under review compared with 17.7% in the prior year driven by improvements at the Foxtel retail channel, partly offset higher volume of churn from lower-value customers on expiring contracts in wholesale channels. Meanwhile, Broadcast ARPU was relatively stable at A$79 (US$52).

The Book Publishing segment reported revenues of $412 million, down 2% from the prior-year period. This year-over-year decline can be attributed to adverse foreign currency fluctuations and tough comparisons with the prior-year period, which garnered higher sales from Rachel Hollis’ titles. The decline was somewhat compensated with the success of Open Book by Jessica Simpson, Find Your Path by Carrie Underwood and Profiles in Corruption by Peter Schweizer. Digital sales, which constituted 23% of Consumer revenues, improved 3% from the prior-year quarter. Adjusted revenues for the segment fell 1%, while adjusted EBITDA improved 6%.

Revenues at the Digital Real Estate Services segment fell 4% year over year to $261 million due to negative impact from foreign currency fluctuations and COVID-19 pandemic. Adjusted revenues for the segment remained almost flat, while adjusted EBITDA advanced 9%.

Revenues at REA Group dropped 5% year over year to $143 million primarily due to unfavorable impact from foreign currency fluctuations, partly offset by increased revenues from its financial services business. Further, revenues at Move fell 2% to $118 million due to adverse impact of the pandemic and lower software and services revenues.

Other Financial Aspects

News Corporation ended the quarter with cash and cash equivalents of $1,388 million, borrowings of $1,115 million and shareholders’ equity of $7,832 million, excluding non-controlling interest of $736 million.

Net cash provided by operating activities of $462 million for the nine months ended Mar 31, 2020, was lower than $661 million in the year-ago period. Capital expenditures of $335 million were incurred during the first nine months of fiscal. Free cash flow available to News Corporation in the nine months period was $63 million compared with $149 million in the prior year period.

Key Things to Note

With respect to News and Information Services segment, management highlighted that due to business closures, social distancing measures and economic uncertainty owing to the pandemic it is seeing an adverse impact on advertising and single-copy sales revenues. While advertising revenues at Dow Jones fell more than 20% in the month of April, digital advertising only, declined moderately. Advertising revenues at News Corp Australia and News UK plunged more than 45%. This also includes an adverse impact of roughly 5% on account of unfavorable foreign currency fluctuations. Nonetheless, despite adversities, the company continued to register sturdy growth in digital subscribers across key properties last month. This comprises more than 20% jump in digital-only subscribers at The Wall Street Journal.

For Subscription Video Services segment, News Corporation informed that suspension of major sporting events will impact customer churn or result in lower subscribers to sports services in the near future. The company has noticed a sharp fall in paid subscribers at Kayo. While as of Mar 31, 2020, there were 444,000 Kayo subscribers, of which 408,000 were paying subscribers, as of May 2nd, there were over 272,000 paying Kayo subscribers. This showcases the impact of cancellation or postponement of sports events due to the coronavirus crisis. The company’s commercial subscription revenues have also been hit due to closures of pubs and clubs and lower occupancy at hotels throughout Australia.

The company stated that the retail market for Book Publishing division has been hurt due to government restrictions worldwide. Nonetheless, management stated that online sales have gained momentum in recent weeks and e-books have returned to growth. As far as Digital Real Estate Services segment is concerned the company is seeing declines in new listings and real estate transactions, thanks to the coronavirus-induced economic uncertainty and businesses closures. At REA Group, national residential listings plunged 33% year over year in the month of April.

Key Picks

Eventbrite, Inc. EB, which carries a Zacks Rank #2 (Buy), delivered a positive earnings surprise in the last reported quarter. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Netflix NFLX, which carries a Zacks Rank #2, has a long-term earnings growth rate of 30%.

Alibaba Group Holding Limited BABA has a trailing four-quarter positive earnings surprise of 19.5%, on average. The stock carries a Zacks Rank #2.

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