News (NWSA) Q1 2014 Earnings Call November 11, 2013 4:30 PM ET
Michael Florin - Senior Vice President and Head of Investor Relations
Robert J. Thomson - Chief Executive Officer and Director
Bedi Ajay Singh - Chief Financial Officer
John Janedis - UBS Investment Bank, Research Division
Justin Diddams - Citigroup Inc, Research Division
Jessica Reif Cohen - BofA Merrill Lynch, Research Division
Eric Katz - Wells Fargo Securities, LLC, Research Division
Alexia S. Quadrani - JP Morgan Chase & Co, Research Division
Douglas M. Arthur - Evercore Partners Inc., Research Division
Adam Alexander - Goldman Sachs Group Inc., Research Division
Fraser McLeish - Crédit Suisse AG, Research Division
William G. Bird - FBR Capital Markets & Co., Research Division
Entcho Raykovski - Deutsche Bank AG, Research Division
Tim Nollen - Macquarie Research
Westcott Rochette - S&P Capital IQ Equity Research
Samantha Elizab Carleton - Crédit Suisse AG, Research Division
Good day, and welcome to the News Corporation First Quarter Earnings Call. Today's conference is being recorded.
At this time, I would like to turn the conference over to Mr. Michael Florin, Senior Vice President and Head of Investor Relations. Please go ahead, sir.
Thank you very much, operator. Hello, everyone, and welcome to News Corp's fiscal first quarter 2014 earnings call. We issued our earnings press release about 30 minutes ago, and it's now posted on our website at www.newscorp.com.
On the call today are Robert Thompson, Chief Executive; and Bedi Singh, Chief Financial Officer. We'll open with some prepared remarks from both Robert and Bedi, and then we'll be happy to take questions from the investment community.
This call may include certain forward-looking information with respect to News Corp's business and strategy. Actual results could differ materially from what is said. News Corporation's Form 10-Q for the 3 months ended September 30, 2013, identifies risks and uncertainties that could cause actual results to differ, and these statements are qualified by the cautionary statements contained in such filings.
Additionally, this call will include certain non-GAAP financial measurements, the definition of and reconciliation of these measures can be found in our earnings release and our 10-Q filing.
Finally, please note that certain financial measures used in this call, such as segment EBITDA, adjusted segment EBITDA and adjusted EPS are expressed on a non-GAAP basis. The GAAP to non-GAAP reconciliation of these non-GAAP measures is included in our earnings release.
With that, I'll pass it over to Robert Thomson for some opening comments.
Robert J. Thomson
Thank you, Mike, and welcome, all, to our first earnings call as the new News. There will certainly be time for questions after Bedi Singh elucidates the figures, but I thought it useful to provide some context to the fledgling company's operations and a sense of its trajectory.
We are confident about our prospects, given the market-leading brands in our midst, the talented executives servicing our companies and the focus that has come from concentrating minds and aggregating assets.
Among our comparative advantages are the following.
We have scale, meaning that we could influence the terms of trade for digital content businesses at a time of mass migration in mass media. There are dramatic shifts underway in the creation, delivery and consumption of content. The platform permutations are multiplying and so are the opportunities to profit.
Secondly, we are diverse globally and see clear opportunities to expand beyond our existing footprint. You will see evidence of those expansion plans in coming months, but it will be expansion based on extending our existing expertise. And we have a robust balance sheet that provides the company with genuine financial flexibility, allowing us to be agile in responding to emerging opportunities. But we also have our costs under vigilant watch, and there is no doubt that the focus of the new News has enabled us to identify inefficiencies and extract expense.
We have been public for a mere 4-or-so months, but the company has a remarkable prominence and a very proud history. We will be candid with you about the challenges, as we have been about the headwinds buffeting our Australian newspaper business. But we are confident that our emerging strategy will well serve our investors, our employees and our customers. Our aim is not just to transform the company but to transform its long-term prospects.
Bedi will provide you with the detailed figures, but the overall themes are as follows. Total segment EBITDA has risen significantly. Adjusted EBITDA is, however, down slightly. Margins in our largest segment, News and Information Services, have risen, even as revenues in Australia have been particularly soft. Free cash flow has improved by $145 million over the same period last year, although comparisons generally are made difficult by the fact that, technically, the company itself didn't exist at this time last year.
We collectively recognize the need to evolve. We must generate more advertising revenue, but overall, be less dependent on advertising and much more subscription-focused. And we must take advantage of the rise of mobile as a platform. Across our businesses, we are seeing exponential increases in the use of smartphones and tablets to access our content. Each platform has unique challenges and opportunities, but we will be among the pioneers on packaging and pricing and profiting in the emerging environment. Our initiatives will play an important role in that development, as we indicated at the Investor Day. Three projects have already been launched. In particular, a global programmatic advertising exchange; secondly, our excellent U.K team has created Sun+, their digital strategy for Britain's best-selling newspaper; and we have just launched BallBall our Asian digital football business, which focuses on upwardly mobile users, smartphones, the web and tablets.
Our advertising exchange, which has involved unprecedented cooperation among all of our media businesses, began trading just over a fortnight ago and has already attracted more than 10 major advertisers. We are able to leverage our leading global brands and our exclusive first-party data, thus allowing us much more leverage over yields and protecting the integrity of our audience.
We are discontinuing remaining arrangements with third-party ad networks, so that any advertiser who wants to reach our great content and premium audiences must do so directly. Some of you will be aware that we acquired exclusive Premier League near-live video clip rights in the U.K., highlighting goals and other monumental moments for subscribers and loyal readers of our British newspapers. But Sun+ is much more than soccer snippets, as the team in London have worked to improve the depths of our digital editorial for subscribers and provide them with retail, leisure and other discounts of at least GBP 200 a month. The purpose behind these subscriptions is to heighten affinity, which is of supreme importance to advertisers frustrated by audiences who have little loyalty and are digitally distracted. On our next call, we'll have firm figures for you as we are now early in the acquisition phase and developing durable metrics on elasticity and churn.
We told you at the Investor Day that we were underrepresented in Asia, where macroeconomic growth rates remain relatively high and smartphone penetration is increasing exponentially. For a modest sum, we acquired exclusive video clip rights for the Premier League and rights to other European soccer leagues for apps and websites for a company called BallBall in Indonesia, Vietnam and Japan. We have been repurposing content and statistics from our London papers, as well as utilizing the WSJ Digital Networks in Japan and Indonesia and the video expertise of FOX SPORTS Australia. Such creative collaboration is crucial to making us more than the sum of our parts. There is no doubt that important lessons from this digital-only venture will be adopted elsewhere in our company as the second screen becomes a first priority.
And within our core companies, the digital transformation continues apace. For example, at HarperCollins, ebooks rose from 15% to 22% of sales, while our margin improved from 11.4% to over 13% in the past year.
We spoke at the Investor Day about plans for e-expansion, and we have since announced a number of initiatives, including subscription deals with Oyster and Scribd. At the Wall Street Journal, where advertising revenue has been stable, it's worth highlighting that mobile usage rose 59% in September compared to the same month last year. Meanwhile, the development team has just completed work on the first phase of DJX, our new B2B product, which will be rolled out over coming months.
In Australia, at REA, of which we earn 61.6%, the management team is constantly seeking to innovate and connecting agents with customers. The revival of the Australian property market has certainly been a benefit, as you can see from today's numbers, and the market cap of the company since July 1 has risen from AUD 3.56 billion to AUD 5.3 billion. While the majority of REA revenues come from within Australia, the company is continuing to expand its international footprint.
At Amplify, Joel Klein and the team are focused on building our K-12 subject matter, which is the most significant segment of the company's 3 divisions. They aim to bring their product to market for the fall of 2014, and you'll be able to track our success as we compete to supply school districts with contemporary curriculum.
We will continue to be disciplined and to seek out opportunities we think will enhance the growth profile of News Corp and complement our existing strengths, but we will also continuously review our asset portfolio.
This quarter, we sold the Dow Jones Local Media Group and our Live Event business at HarperCollins. We concluded that these assets were non-core to News Corp's strategy.
Four months along in the life of the new News, we are even more convinced that the company will thrive as it becomes more digital and increasingly global. We will continue to balance heightened cost consciousness with a need for investment; all informed by the very clear goal of enhancing the value of shareholder returns.
Now let me usher in Bedi Singh, who will furnish you with the financials.
Bedi Ajay Singh
Thank you, Robert, and good afternoon, everyone. First, I'd like to share with you some high-level financial highlights, and then we will discuss each segment in further detail.
We reported fiscal 2014 first quarter total revenues of $2.07 billion, a 3% decrease versus the prior year period revenues of $2.13 billion. Excluding the impact of acquisitions, divestitures and adjusting for foreign exchange fluctuations, total revenue declined 4%. The earnings release, you will see, includes a reconciliation to reflect these adjustments.
Turning to EBITDA, we reported total segment EBITDA of $141 million, which was a 58% increase versus the prior year period, again excluding all acquisitions and divestitures, most notably FOX SPORTS Australia, which we acquired last November; and the Dow Jones Local Media Group, which we sold in September of this year. All costs related to the U.K. Newspaper Matters, which were $17 million this quarter, and excluding foreign exchange fluctuations, total EBITDA declined this year by 5%.
Reported diluted EPS were a positive $0.05 versus negative $0.16 in the prior period. Excluding restructuring charges, the U.K. Newspaper Matters costs and other one-time items, adjusted EPS was $0.03, down from $0.06 in the prior period. But importantly, free cash flow available to News Corp improved by $145 million compared to the prior year.
Now let's turn to the individual operating segments. In News and Information Services, revenues declined $171 million, or 10%, versus the prior year. Australia accounted for $121 million, or around 70% of the segment decline, of which almost half was due to foreign exchange.
Within segment revenues, total advertising declined 12%, of which FX was 4%. And looking at advertising performance across our key units, at News Corp Australia, newspaper advertising revenues declined around 25%, including a 10% negative impact from foreign currency.
News U.K. advertising declined 7%, with the majority of the decline being due to incremental Olympic spending last year.
Wall Street Journal advertising domestically was virtually flat with the prior year. And overall, Dow Jones advertising was down low single digits, impacted by some weakness in Asia and Europe.
We haven't seen, so far, any inflection points in advertising in either direction. Australia remains very challenged, while the U.K. and U.S. have been more stable, but we recognize that visibility is still somewhat limited.
Circulation and subscription revenues declined 6%, of which FX was 3%. We were hurt this quarter by lower print volumes, a decline in institutional sales at Dow Jones, which were partially offset by cover price increases in the U.K. and Australia and growth at The Wall Street Journal and WSJ.com.
As Robert mentioned, this past quarter, we launched Sun+, our paywall in the U.K., bundled with English Premier League highlight clips, and have put all of our major mastheads in Australia behind a paywall.
We have also relaunched the New York Post website, and we are also in the early phases of rolling out DJX, our bundled institutional offering at Dow Jones, and the conversion to this single product offering had a modest negative impact this quarter to revenues.
At News America Marketing, sales improved 3% versus last year, led by strong double-digit growth in the in-store business, consistent with our comments at the Investor Day. And importantly, we saw margin expansion there this quarter. We saw growth in Canada and growth in several food and drug categories.
Operating costs for News and Information Services were down 12% this quarter. That was due mainly to lower headcount, as we realized some savings from prior year restructurings, lower newsprint costs and production costs and lower marketing expenses.
Returning to News and Information Services EBITDA, this increased $7 million, or 6% versus last year. We saw strong profit contributions from News UK, News America Marketing and also benefited from the absence of losses from The Daily last year, partially offset by continued weakness in Australia and foreign currency impacts.
So if you look at EBITDA, excluding the sale of Local Media Group and foreign exchange fluctuations, segment revenues -- sorry, EBITDA increased 12% and segment revenues declined 6%. We do not believe this level of EBITDA growth or margin expansion is indicative of the next few quarters or a run rate. We have several initiatives, which we are in the early stages, including DJX at Dow Jones, Sun+ at News UK, and we are developing our digital assets in Australia.
In Cable Network Programming, segment revenues this quarter were $132 million, and segment EBITDA was $29 million. On a standalone basis, assuming we had owned FOX SPORTS Australia in the prior year quarter, revenues were flat and segment EBITDA declined 31%. However, excluding foreign exchange fluctuations, revenues increased 14% and EBITDA declined 21%. Advertising improved strong double digits, thanks to solid audience gains and increased government spending around the elections. Subscription revenues grew approximately 8%, helped by an increase in digital platform subscribers.
The decline in Cable Network Programming EBITDA was driven primarily by timing of higher expenses associated with the airing of the National Rugby League rights contract, which began in March 2013. Operating expenses should be lower in Q2, which is seasonal, given our roster of sports rights.
In Digital Real Estate Services, REA revenues increased $9 million, or 11% compared to last year, reflecting increased revenues from listing depth penetration and new product growth.
Segment EBITDA increased $9 million, or 26%, compared to the corresponding prior year period, primarily due to the increased revenue. Margins were 48.9%, up from 43.2% in the prior year. Excluding foreign currency, revenue and EBITDA grew 23% and 43%, respectively.
Turning to the Book Publishing segment. Revenues declined 7%, but EBITDA grew 8% versus the prior year. The top line this quarter was hurt by the sale of the Women of Faith live events business, the decision to exit the U.S. distribution business, a soft Christian publishing marketplace and foreign currency fluctuations.
Looking deeper at the results, we had a very strong performance this quarter in ebooks. Some key titles to call out were the Veronica Roth Divergent series in children's and Daniel Silva's English Girl in general books.
For the quarter, ebooks as a percentage of revenues improved to 22% from 15% in the prior period, and total ebook sales improved by over 30%. We're very excited by the pipeline of titles in Q2, led by Allegiant, the final chapter in the Divergent series, which debuted October 22 and has sold approximately 1.8 million copies to date. This should lead to an improved performance for Q2, even with some revenue headwinds from the sale of the Live Events business. And EBITDA margins advanced to 13.1% from 11.4%. The EBITDA growth and margin improvement was driven by higher ebook penetration and improved operating efficiencies.
In our Other segment, which includes Amplify, our corporate Strategy and Creative Group, corporate overhead and costs related to U.K. Newspaper Matters, segment EBITDA improved $4 million, primarily due to lower costs of approximately $44 million related to the U.K. Newspaper Matters, partially offset by higher expenses of $29 million at Amplify; $6 million incurred by our corporate Strategy and Creative Group, including the launch of BallBall as mentioned by Robert; and increased corporate overhead expenses of $8 million compared to an allocated basis used for fiscal 2013.
In the quarter, we incurred $40 million related to the U.K. Newspaper Matters, of which the net impact on total segment EBITDA was $17 million. That's net pre-tax costs after the indemnification from 21st Century Fox.
Now for the full year, we expect corporate overhead to be in the $140 million to $160 million range, consistent with our comments at the Investor Day. For our corporate Strategy and Creative Group, we will likely spend in the $35 million to $45 million range. This includes spending on our BallBall product offering, including small rights acquisition costs, our advertising exchange, as well as a few other key initiatives currently in development.
On Amplify, we expect operating losses to be higher than in fiscal '13. But in contrast to last year, costs are unlikely to ramp up from the first quarter as curriculum development is now well underway.
Turning to equity income, our earnings from affiliates were $13 million this quarter compared to $26 million last year. The lower contribution primarily reflects the absence of the 44% stake in SKY Network Television, which was sold in March 2013, and the consolidation of FOX SPORTS Australia in November 2012.
On the plus side, we had higher contribution from Foxtel, which benefited from an increased ownership to 50% from 25% in November 2012. Foxtel's EBITDA grew mid-teens this quarter in local currency.
Turning now to cash flow. For the quarter, cash flow from operations improved to positive $59 million compared to negative $87 million last year, and free cash flow available to News Corp improved to negative $10 million versus negative $155 million last year. This improvement was driven by lower restructuring payments, lower costs related to U.K. Newspaper Matters, lower tax payments and the inclusion of FOX SPORTS Australia, partially offset by the absence of cash distributions from SKY Network Television last year.
On our P&L statement, you can see that we recorded a tax benefit and a corresponding expense in Other of $483 million. This relates to a tax refund we received in October over past claims in a foreign jurisdiction which had been in dispute. This refund will be remitted to 21st Century Fox as part of a tax sharing and indemnification agreement. This item is a pass-through only and had no impact on net income, EPS or free cash flow.
And finally, a few additional items. We expect full year CapEx to be higher than fiscal '13 and more in line with levels seen in fiscal '12 of $375 million, as we had discussed at the Investor Day. We expect the majority of our capital investment to be continued to be focused on technology innovation, including the roll out of our common publishing system. CapEx this quarter was $67 million versus $64 million last year.
Restructuring costs were down significantly this quarter at $27 million, of which $23 million was related to the newspaper business, compared to $115 million in the prior year. Last year, restructuring costs totaled $293 million. We continue to expect this to come down this year. We continually review our portfolio of assets. This quarter, we realized $96 million in proceeds, mostly related to the sale of the Local Media Group and a few smaller transactions, including the HarperCollins Live Events business, which we viewed as non-core to News Corp.
On the U.K. Newspaper Matters, we have accrued approximately $78 million, of which $53 million will be indemnified by 21st Century Fox. This represents our best estimate of that liability for the claims that have been filed as of quarter end.
Cash on the balance sheet as of 30th of September was around $2.7 billion, which includes $230 million of cash in REA.
And lastly, we entered into a $650 million, 5-year revolving credit facility. There are no funds drawn on it at this time. We view the revolver as a financially prudent instrument, and consistent with most of our peers.
So in summary, expenses are on the right track, while the revenues remain under pressure. We have been candid about some of the headwinds we face, particularly in News and Information Services. We continue to view fiscal '14 as a transition year as we balance ongoing operational efficiencies with prudent investments and focus on stabilizing top-line performance. We look forward to continuing to update you on our progress throughout the year.
And with that, let me turn back to the operator for our Q&A session.
Earnings Call Part 2: