News Corp (NWS) 2018 Q1 法說會逐字稿

Good day, and welcome to the News Corp First Quarter Fiscal 2018 Earnings Conference Call. Today's call is being recorded. Media is allowed to join today's conference in a listen-only basis.

At this time, for opening remarks and introductions, I'd like to turn the conference over to Mr. Mike Florin, Senior Vice President and Head of Investor Relations. Please go ahead, sir.

Thank you very much, Lynette. Hello, everyone, and welcome to News Corp's Fiscal First Quarter 2018 Earnings Call. We issued our earnings press release about 1 hour ago, and it's now posted on our website at newscorp.com.

On the call today are Robert Thomson, Chief Executive; and Susan Panuccio, Chief Financial Officer. We will open with some prepared remarks, 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 Corp's Form 10-K and Form 10-Q filings identify risks and uncertainties that could cause actual results to differ and contain cautionary statements regarding forward-looking information.

Additionally, this call will include certain non-GAAP financial measurements such as total segment EBITDA, adjusted segment EBITDA and adjusted EPS. The definitions and GAAP to non-GAAP reconciliations of such measures can be found in our earnings release.

With that, I'll pass it over to Robert Thomson for some opening comments.

Thank you, Mike. Our new fiscal year is off to a sterling start, with robust results reflecting our steadfast strategy to pursue global and digital expansion and to create a cogently balanced revenue mix.

In the first quarter, revenues and EBITDA increased across every segment of our business compared to the same quarter last year, with particularly strong growth in digital real estate, where we continue to be the world's largest and leading company. In summary, revenues grew 5% to $2.1 billion and reported total segment EBITDA grew 92% to reach $249 million, up from $130 million in the prior year. Adjusted total segment EBITDA grew 46%. Reported earnings per share grew to $0.12 versus a loss of $0.03 in the prior year.

These results truly underscore the increasing strength of digital real estate and how it has positively transformed the character of News Corp and positioned us for further growth in the future. We can also see the tangible benefits of our sustained commitment to cost reduction while we continue to invest in the highest quality content.

In August, we and Telstra in Australia announced a nonbinding agreement to combine Foxtel and Fox Sports, with News Corp owning 65% of the new company. Pending definitive documentation and regulatory approval, we expect to close in the first half of calendar year 2018. Combining Foxtel and Fox Sports and providing News Corp with majority control should give us a better opportunity to take advantage of fortified scale to leverage our immensely valuable sports and entertainment rights as well as a boosting our ability to collect permissioned customer data.

We await regulatory approval and discussion over details continues with our partner, Telstra. But once completed, the combined company is expected to make a substantial contribution to our revenue and EBITDA and fundamentally transform the nature of News Corp.

There was another fundamental change last month which also bodes well for our future, and that of other premium use provider. Google said it would end First Click Free, a seemingly innocently titled policy that undermined business models and damaged providence in societies by banishing premium subscription content. As many of you are aware, Rupert, Lachlan and I, along with our colleagues at News Corp, have long taken a principled and often solitary stand to protect intellectual property and safeguard journalism, so we appreciate this significant first step taken by Google. We will, of course, be monitoring the effect of this change across our mastheads even as we continue our discussions with Google and with Facebook about the ways we can profitably connect readers with our mastheads.

We continue to be deeply concerned by the abusive algorithms and by an adulterated digital ad market, which had promised transparency but has delivered opacity, undermining the confidence of advertisers in the digital marketplace. It is clear that advertisers want their products to be promoted on sites that enhance, not tarnish, their image and that they want metrics that are reliable, not risible.

And while on the subject of premium content, let us delve into the News and Information segment, which fared well this quarter with digital subscriptions up at The Wall Street Journal and at other mastheads across the company. Despite the continued challenging advertising trends, our cost consciousness and steady circulation growth helped drive EBITDA growth of 59% in the segment.

At Dow Jones, digital accounted for 60% of revenues, a record number. Circulation revenues grew 11% and professional information business revenues increased by 5%, led by risk and compliance with a strong 35% increase year-over-year. We saw continued subscriber volume growth at The Wall Street Journal with over 2.2 million total subscribers, approximately 60% of them digital. The ongoing implementation of the WSJ 2020 strategy helped to reduce costs while increasing efficiency.

At the New York Post, we saw digital audience growth of 30% to 84 million unique visitors in September compared to the prior year. Clearly, our U.S. mastheads have a large audience, respected brands and measurable meaningful metrics. With the upcoming launch of News IQ, our premium digital advertising platform, we will leverage our quality journalism to connect advertisers with our fast-growing U.S. audience, which reached 115 million monthly unique visitors in September. That number is deduped unlike many inflated numbers in the digital world, better to be deduped than duped.

At news in Australia, we emerged as the #1 digital network across all key categories. And total digital subscribers across our mastheads, including ARM, grew more than 30% to over 375,000. Meanwhile, costs continue to be diligently managed by Michael Miller and his team as the composition of the business evolves. Susan Panuccio will explain shortly in more detail.

At News UK, Sun Digital continues to outpace the competition in growth across all devices with 85 million monthly average uniques globally in the quarter based on ABCe. We're also gaining on the competition in the U.K., and according to comScore U.K., Sun Digital is now the largest news brand on mobile in the U.K.

Audience engagement is on the rise and digital advertising revenues doubled versus the prior year. This summer saw the launch of the Sun Savers digital reward program targeted for casual print buyers. By the end of the first quarter, there were approximately 300,000 registered users, each of whom had provided extra data intelligence in return for genuine discounts from select Sun partners.

Total subscriptions were up across The Times and The Sunday Times as well, exceeding 450,000 at quarter's end, driven in part by new subscriptions campaign. Digital subscriptions grew 17% in the quarter to 212,000, proving that high-quality journalism will attract a discerning paying audience.

Meanwhile at Wireless Group, which Rebekah Brooks and her team have successfully integrated, we saw the arrival of high-profile talent, particularly at talkSPORT radio, spurring both digital audience growth and Internet-only listening. We have also made progress with exclusive sports rights, including a 4-fight boxing package and the NFL, which is growing in popularity in the U.K.

In a world of murky social media and user-generated content, which is too often abuser-generated content, Storyful is playing an increasingly important role, verifying facts and assisting companies and brands subject to virulent attacks. Storyful, under its new CEO, Sharb Farjami, can not only sift fact from fiction but provide risk analysis for its expanding roster of clients.

Turning to digital real estate. Overall segment EBITDA is up 42% with 20% revenue growth, meaning that the segment was once again the biggest contributor to News Corp's profitability. At Move, home of realtor.com, we saw core real estate revenues grow 21% as the U.S. property market continued its gradual recovery from the financial crisis.

From a macro perspective, only 5.4% of mortgage holders were underwater compared to 7.1% last year and a peak of 26% in 2009 according to Corelogic. Overall, revenue growth of 15% was partially offset by the $3 million decline in revenue associated with the TigerLead divestiture last November when we chose to focus on the core leads in listening space business. Excluding the impact from the sale, we saw growth at Move of 19% in toto, putting it in prime position to benefit from the continuing recovery in real estate.

We are also increasing our focus on New York City, where realtor.com is developing its services, brand and reputation, taking advantage of the conflict between a lesser competitor and real estate companies, agents and brokers, who have wearied of its arrogance and impetuosity and, who rightly fear its long-term ambition to disintermediate agents and brokers. Across the nation, realtor.com has the most ML-listed for sale homes that are updated every 15 minutes to the benefit of vendors, potential buyers and realtors.

In Australia at REA, we're empowering consumers with REA's acquisition of Smartline, a savvy mortgage broking franchise and its new home loan business, which is being developed in conjunction with National Australia Bank.

Building the financial segment of the business has been an important component of REA's growth strategy, and the extension into the more huge broker business is a sensible step forward. Meanwhile, REA remains the clear leader in Australia's digital real estate markets, with the listing environment performing particularly well in Sydney and Melbourne, and the core residential business remaining very strong.

We saw another solid quarter in Book Publishing, where HarperCollins experienced both revenue and EBITDA growth, powered by the continued success of Hillbilly Elegy and The Subtle Art of Not Giving an (Expletive) as well as the strength of new releases such as Daniel Silva's House of Spies, Karin Slaughter's The Good Daughter and others. New for the second quarter, we have Capital Gaines by Chip Gaines, the latest addition of the popular series, The Pioneer Woman Cooks by Ree Drummond and Bruce Dickinson's autobiography. As you erudite folk on the call well appreciate, Mr. Dickinson is the lead vocalist of Iron Maiden.

Looking ahead, HarperCollins is taking advantage of its global English rights to Agatha Christie's Murder on the Orient Express to market the book in conjunction with the imminent release of Fox's movie of the same name. The denouement is worth the price of both the film and the book.

At Foxtel, there was improved volume growth in the first quarter compared to the fourth quarter of the last fiscal year, led by the strength of Foxtel Now. Foxtel also benefited from lower churn in the quarter. And this week, the company announced the launch of a new IP streaming device as it focuses on improving the user experience.

Fox Sports Australia had revenue growth due to higher affiliate revenues, which more than offset lower ad revenues. And the network also saw a boost from the McGregor-Mayweather fight, which highlighted the potential value of pay-per-view offerings in a sports-hungry Australia. We're excited about the upcoming launch of Watch NRL, a global IP product, which follows the success of Watch IFL as we continue to expand the breadth of product offering of Fox Sports Australia and proselytize the virtues of Australian sports.

Before I turn things over to our esteemed CFO, Susan Panuccio, it is worth reiterating that our first quarter was an auspicious way to begin a new fiscal year, with revenue growth and increased profitability across the company. We saw the fruits of much labor to make this a more global and digital company, one increasingly defined by its growing digital real estate business and complemented by more recurring revenues from our cable and satellite businesses and subscription media offerings.

We do have reason for optimism about the future of our premium mastheads in light of Google's reforms and our ongoing discussions with Facebook, and most importantly because of the enduring quality of our journalism. Across our properties, we believe in providence and are sure that increasingly, there will be a premium for the premium. Over to you, Susan.

Thank you, Robert.

Turning to the financials. We delivered very strong operating results for the first fiscal quarter of 2018. We reported fiscal 2018 first quarter total revenues of around $2.1 billion, an increase of $93 million or 5% compared to the prior year. Of that increase, acquisitions and divestments accounted for $51 million and currency added $26 million, with the balance being operational. Excluding those items, adjusted revenues grew 1%.

Reported total segment EBITDA was $249 million compared to $130 million in the prior year, up 92% versus the prior year. Reported results include a benefit of $46 million from the reversal with previously accrued net liabilities related to certain employment taxes in the U.K. Excluding the net impact of acquisitions, divestments, foreign currency and the U.K. newspaper masses, adjusted total segment EBITDA this quarter grew 46%. For the quarter, earnings per share were $0.12 compared to a loss of $0.03 in the prior year, and adjusted earnings per share was $0.07 compared to a loss of $0.01 in the prior year.

Turning now to the individual operating segments. In News and Information Services, revenues for the quarter were $1.2 billion, up 2% compared to the prior year. The Wireless Group and the Australian Regional Media, or ARM, acquisitions contributed $54 million and FX contributed $14 million this quarter. Within segment revenues, advertising was flat and circulation and subscription revenues increased 3%.

News and Information Services reported segment EBITDA this quarter with $73 million or up 59% versus the prior year, led by an improvement at Dow Jones, ongoing cost initiatives, lower investment spending at Checkout 51 and the absence of transaction costs related to the acquisition of Wireless Group in the prior year.

I will now look at the performance for the quarter across our key operation divisions. At Dow Jones, total revenues rose 2%. Within that, advertising revenue declined 10% versus the prior year and saw a modest improvement from the fourth quarter decline due to a slight uplift in financial spending while the business to consumer and technology categories remained challenging.

Digital accounted for approximately 38% of Dow Jones advertising revenues this quarter, the highest percentage in its history, up from 33% in financial year '17. Total subscriber volumes at The Wall Street Journal across all formats was over 2.2 million, a 13% year-over-year increase, driven by higher digital-only subscriptions, which rose approximately 36% versus the prior year to $1.3 million and represented 58% of the total subscribers versus 48% in the prior year.

Year-over-year circulation revenue growth at Dow Jones was 11% for the quarter, driven by the digital volume gains and higher subscription pricing. As mentioned by Robert, professional information business revenues grew 5% in the first quarter, continuing to accelerate from prior quarter levels, led by risk and compliance, which grew 35%, marking the strongest year-over-year performance since 2014.

In Q1, professional information business revenues represented slightly less than 1/3 of Dow Jones revenues. The Wall Street Journal 2020 program, as previously discussed, is not only about cost transformation but also focuses on The Wall Street Journal becoming a digital-first organization, including more aggressively expanding our digital offerings internationally.

Over the past year, Wall Street Journal digital subscriptions have nearly doubled in Europe and have grown by almost 70% in Asia. Our international footprint is being further expanded by the global reach of our conferences, including the launch of the Tokyo CEO Council and the WSJ D.Live in Hong Kong.

At News Australia, total revenues rose 4%, helped by the integration of the ARM acquisition and foreign currency benefits. Advertising revenues for the quarter increased 3% or declined 1% in local currency, helped by the acquisition of ARM. Excluding acquisitions and divestitures, advertising revenues declined approximately 10% in local currency, relatively similar to the prior quarter.

Circulation revenues at News Australia increased 6% or up 2% in local currency as the acquisition of ARM, cover price increases and higher-paid digital subscriptions were partially offset by print volume declines in the sale of the Sunday Times last year.

Regarding our ongoing cost transformation, we remain particularly focused on News Australia, given its reliance on print and higher exposure to advertising revenues. While we are currently targeting at least AUD 40 million in cost reductions this year, the team in Australia are already pacing well ahead of that as they continue to be cost focused, together with continuing their review of the broader regional and community newspaper portfolio following the acquisition of ARM.

The team's focus in Australia is not just to remove legacy costs but to ensure the cost structure is right-sized for the business moving forward. Australia is also making steady progress in the digital conversion, with digital subscribers across the News Australia mastheads now reaching more than 375,000 paid subscribers, including the ARM properties, which is over 30% higher than the prior year.

At News UK, total revenues were down 6%. Advertising revenues declined 9%, which is an improvement from the fourth quarter rate due to continued but moderating print advertising declines at The Times and The Sun and an acceleration in digital advertising at The Sun, driven by higher audience and improved engagement. Circulation revenues at News UK were down 5% as volume declines at The Sun more than offset cover price increases. Finally, at News America Marketing, revenues fell 4% due to ongoing weakness in freestanding insert revenues, which had 2 fewer inserts versus the prior year.

Turning to the Book Publishing segment. Revenues for the quarter increased 3% to $401 million and segment EBITDA increased 4% to $50 million. Titles to highlight this quarter included Daniel Silva's House of Spies and Karin Slaughter's The Good Daughter as well as carryover sales from J.D. Vance's Hillbilly Elegy.

Total digital revenues for the quarter grew 6% to represent 21% of consumer revenues compared to 20% in the prior year due to strength in downloadable audiobooks. In Digital Real Estate Services, segment revenues increased 20% to $271 million and adjusted revenues increased 19%. Reported segment EBITDA was $95 million versus $67 million last year, up 42%.

REA Group revenues grew 22% due to very strong residential debt revenue growth in Australia, including higher penetration for Premiere All, the integration of the Smartline acquisition and modest benefit from currency, partially offset by the divestment of the European businesses last year. Listing volume were stable this quarter but importantly saw a pickup in New South Wales and Victoria. Please refer to REA's earnings release and the conference call, which will commence shortly after this call for additional details.

Move revenues rose approximately 15% to $107 million versus the prior year, driven by a very strong performance from connection suppliers, which is benefiting from strong growth in lead volume as well as improved pricing optimization in inventory management. TigerLead, which was divested in November 2016, contributed $3 million of revenues in the prior period. Excluding that, revenue growth would have been approximately 19%. Average monthly unique users at realtor.com grew to 55 million for the quarter, rising mid-single digits from the prior year.

In Cable Network Programming, revenues increased $17 million or 13% to $145 million compared to the prior year quarter, driven by the inclusion of Sky News, which added $11 million to revenues and higher affiliate fees from Foxtel. Segment EBITDA in the quarter rose to $27 million from $14 million due to the phasing of programming amortization related to the rollout of the FOX LEAGUE channel, a network dedicated to the NRL, which led to a benefit of approximately $10 million this quarter. The results also reflect lower other sports programming rights costs, including impact on the absence of Australia versus Sri Lanka cricket tour in the prior year. With respect to equity losses/earnings from affiliates, equity losses were $10 million this quarter compared to $15 million in last quarter.

Foxtel revenues for the quarter rose 2% to [$633 million] (corrected by company after the call) but declined 2% in local currency. EBITDA decreased 15% to $122 million and was down 18% in local currency due to planned increases in sports rights costs of approximately $24 million, primarily related to the new IFL contract, partially offset by lower transmission and sales and marketing costs.

Regarding its operating metrics, Foxtel ended the quarter with over 2.8 million subscribers, up 2% versus the fourth quarter driven by the rollout of Foxtel Now. In the first quarter, cable and satellite churn improved to 12.7%, down from 15.5% last year. Cable and satellite ARPU for the quarter was down approximately 2% to around AUD 86.

For the quarter, capital expenditures were $62 million compared to $49 million in the prior year, with increases driven by higher IT spending. However, overall CapEx in fiscal 2018 should be in line with the prior year.

Looking forward to the second quarter, there are a few points I would like to make. At News and Information Services, print advertising trading conditions remain challenging and visibility is limited. We expect ongoing print advertising headwinds and we'll continue to focus on cost efficiencies accordingly.

In addition, News America Marketing will again have 2 less freestanding inserts in the quarter, similar to the first quarter. We expect Fox Sports Australia to face higher costs in the second quarter, a reversal from quarter 1 due to the amortization of NRL rights throughout the year. We expect over AUD 25 million in higher costs for the second quarter compared to the prior year period. For the full year, we continue to expect AUD 30 million to AUD 40 million in higher costs, mostly related to the NRL, much of which should be offset by higher affiliate revenues and production cost initiatives.

In Book Publishing, overall trends remain favorable with digital contribution rising modestly. As Robert mentioned, notable new releases this quarter include Ree Drummond's Pioneer Woman Cooks: Come and Get It! and Capital Gaines from Chip Gaines, co-author of The Magnolia Story.

At Digital Real Estate Services, we expect continued strong growth in REA, including incremental revenues from the expansion into the mortgage brokerage business and continued growth at Realtor.

With that, let me hand it over to the operator for Q&A.

(Operator Instructions) We'll take your first question from Entcho Raykovski from Deutsche Bank.

My question is around the digital subs within News and Info Services. And I mean, you're obviously seeing some very strong growth rates year-on-year, but there has been some slight slowdown in net digital ads for the quarter. Is there any seasonality to those numbers that's impacting those ads? And if we look, say, a couple of years out, given you are still seeing strong year-on-year growth rates, where do you expect the digital subs to be for The Journal in Australia in particular?

Well, Entcho, generally, we're very confident about digital subs. And clearly, the changes that Google have made to First Click Free, I -- the abolition of it will itself create an environment, an ecosystem, which is itself more conducive to subscription because the fact was that Google was punishing/banishing premium content by not indexing it. And so the early signs are positive but they're, of course, early. But what you'll see over the next couple of months is it's sites like The Wall Street Journal in Australia and The Times and our other subscription offerings are properly indexed by Google, that the content is properly surfaced and the propensity for people to subscribe should increase.

We'll move next to Craig Huber from Huber Research Partners.

I'd be curious to hear, you've had very strong performance at realtor.com since you bought it a few years ago. Could you just tell us what you generally what you have done there to improve the operations. They're dramatically, frankly, versus the prior ownership?

Thank you for that question, Craig. What we envisaged when we took over Move, as it's known, but realtor.com as we prefer to refer to it, is that we'd be able to use our media platforms to complement the Realtor platform to drive traffic, to increase engagement by improving news and analysis. And frankly, those things have happened. We're really copying the model that Lachlan Murdoch have envisaged with the initial investment in REA back many years ago. And look, we're not complacent for a second because while it's obviously strong growth there and you remember this time last year, it was single-digit growth in revenue. It's now well into double digits. We are constantly reflecting on what we can do better, how we can serve realtors more efficiently but also how we can drive revenue and EBITDA growth for the benefit of all our shareholders.

(Operator Instructions) We'll move next to Brian Han from Morningstar.

On the Foxtel-Fox Sports merger, have you done any work on areas where you can expect synergies? And will M&A be a focus of the combined entity?

Well, as you know, the discussions are continuing with Telstra, and we'd hoped -- and subject to regulatory approval, we'd hoped that there'll be agreement in the second half of the financial year. But the 3 reasons for doing this deal: scale, which is increasingly important in a competitive media environment; the resident brands that the combined Foxtel and Fox Sports will have; and the great collection of sports and entertainment content that's inherent in the consolidation of the company. That clearly, there are going to be synergies, but not just synergies. There will be an ability for us to take advantage of changes in the digital marketplace. We're going to be digitally deft, not digitally daft. And for example, it's not OTT to expect OTT growth in Australia, and we'll be able to prepare for that. Susan?

Yes. Thanks, Robert. I think, Brian, one of the benefits of doing this combination will be the flexibility we have to launch new products, particularly when we're moving to consolidate its position where we can control it, particularly in the sports area. And of course, part of the exercise that we're looking at the moment is where we do extract synergies between the 2 companies. So that's going to be an important path going forward as well.

That will come from Raymond Tong from Evans & Partners.

Just a question for you maybe, Robert, just wondering whether you could provide an update on your discussions on putting The Wall Street Journal content on the Facebook platform and the amazing comments a couple of months ago, but can you maybe sort of just give us a sense of where you're at with this, please?

It's not opportune to reveal the details of those negotiations at the moment other than to say that they are ongoing at a very senior level. But it is reflective of a fundamental change in the approach to content. The content landscape, which clearly was not beneficial to producers of great journalism as we do across the world with our mastheads and has become (inaudible) to us being able to extract a reasonable price and increase elasticity for those mastheads. So all I can say is that it's still early days, but it's also fair to say that there has been a fundamental change in the attitude to content by both Google and Facebook. And we are still at an early phase of that evolution of the relationship between us and those companies.

We'll take a follow-up from Brian Han from Morningstar.

Susan, as you continue on your digitization journey, where do you think your D&A charge will settle at?

That's a very good question. I mean, I don't think we expect actually it to increase massively at the moment. We're looking to keep it relatively consistently going forward. As you can see, our CapEx spend is going to be relatively in line for the full year. So we're not expecting to see significant changes in that line.

And at this time, we have no additional callers in the queue.

Great. Well, thank you all very much for participating. Have a great day.

That does conclude today's teleconference. We thank you all for your participation.