NWSA
#Good day, ladies and gentlemen.
Welcome to the News Corp second quarter FY17 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.
<UNK> <UNK>, Senior Vice President and Head of Investor Relations.
Please go ahead, sir.
Thank you very much, Katherine.
Hello, everyone, and welcome to News Corp's fiscal second quarter 2017 earnings call.
We issued our earnings press release about 45 minutes ago and it's now posted on our website, at newscorp.com.
On the call today are <UNK> <UNK>, Chief Executive, and <UNK> <UNK>, 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 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 will pass it over to <UNK> <UNK> for some opening comments.
Thank you, <UNK>.
In the second quarter, we saw the efficacy of our strategic reinvestment and digital diversification.
Both were evident in our increased operating profitability in the quarter, when the challenges in the advertising market, which is in the midst of transition, were patent.
We achieved 16% EBITDA growth year-over-year, driven by strong performance in our Digital Real Estate Services segment and robust revenues at HarperCollins, along with appropriate and ongoing management of the cost base at our news mastheads.
As noted in the press release, reported earnings were significantly impacted by a non-cash reduction in the current value of Foxtel and a non-cash impairment charge related to our print properties in Australia, while they also benefited from a one-time gain as a result of the cash proceeds from the sale of REA\
Thanks, <UNK>.
We reported FY17 second quarter total revenue of $2.1 billion, down around 2% compared to the prior year.
Currency had a $53 million unfavorable impact to revenues, with modest year-over-year improvement in the Australian dollar more than offset by continued weakness in the pound sterling.
Reported total segment EBITDA was $325 million, compared to $280 million, up 16% versus the prior year.
For the quarter, EPS from continuing operations were negative $0.50, compared to $0.15 in the prior year.
Significant nonrecurring items impacting EPS in the current quarter include a pretax non-cash impairment charge of $310 million principally related to fixed assets of the Australian publishing business.
In addition, equity earnings of affiliates include a pretax write-down of $227 million to reduce our carrying value of Foxtel.
These were offset, in part, by a pretax gain of $120 million at REA from the sale of their European businesses and a significant improvement in our operating results.
Adjusted EPS from continuing operations were $0.19 versus $0.20 in the prior year; and adjusted EPS excludes the items I just mentioned and the other items shown in the press release reconciliation table.
Turning to the individual operating segments.
At News and Information Services, revenues for the quarter decreased 7% from the prior year to approximately $1.3 billion.
And within segment revenues, advertising, which accounted for 53% of revenues this quarter, decreased around 9%, or down 8% in local currency, driven by weaker global print ad trends.
Circulation and subscription revenues decreased 5%, but rose 1% in local currency, driven by price increases and higher paid visitor volume offset by lower print volume.
News and Information Services segment EBITDA this quarter was $142 million, down from $158 million in the prior period, or approximately 10% down, driven principally by lower print advertising revenues partially offset by cost saving initiatives and higher profit contribution at News America Marketing and at News UK versus the prior year.
Looking now at performance across our key units.
At Dow Jones, total ad revenues declined around 20%, similar to the prior quarter rate, as The Wall Street Journal continued to face challenges in several ad categories, including business-to-consumer, finance and technology.
Circulation revenues at Dow Jones grew 6%, driven by higher subscription pricing and higher digital paid subscribers.
And Professional Information Business revenues were relatively stable with the prior year, similar to last quarter.
And as we mentioned last quarter, Dow Jones has begun the implementation of cost savings initiatives under its WSJ2020 plan, with a target of approximately 8%, or $100 million, in cost savings on an annualized basis by the end of FY18.
We continue to expect a pretax restructuring charge of $50 million to $60 million for this fiscal year, including $17 million that was reflected this quarter.
At News Australia, advertising revenues remain challenged and for the quarter declined 12%, or approximately 15% in local currency, with continued weakness in retail, real estate and auto.
Circulation revenues at News Australia increased 1%, but were slightly lower in local currency, as cover price increases and higher paid digital subs were more than offset by print volume declines.
On cost initiatives, as I mentioned last quarter, we are on track for an additional AUD40 million in cost savings in the second half and continue to seek additional cost reductions this year.
As I mentioned earlier, we recognized a non-cash impairment charge of $310 million, reflecting a write-down of the carrying value on our fixed assets in Australia.
Following this impairment, the carrying value of the remaining long-lived assets at News Australia is approximately $420 million.
At News UK, whilst reported advertising revenues decreased 29%, ad revenues were down only in lower teens in local currency, due to print declines, a slight improvement from the prior quarter rate.
Reported circulation revenues at News UK declined high teens versus the prior-year quarter, but were flat in local currency, as cover price increases were offset by single copy volume declines.
News UK benefited this quarter from a combination of cost savings initiatives, including lower sports rights costs for The Sun, lower marketing and lower production costs.
While this group contributed around $25 million to reported revenues this quarter, representing low single digit growth in local currency driven by talkSPORT, the integration into News UK is progressing well.
Commercial efforts are now focused on extending News UK\
(Operator Instructions) <UNK> <UNK>, Jefferies.
Hi.
Thank you.
On Dow Jones, with the revenue there more than 50% digital, how quickly are the digital circulation and advertising buckets growing.
Is the Journal primarily competing with Facebook and Google or traditional publishers for ad budgets.
And what is the time line of the $100 million in cost savings.
<UNK>, <UNK> here.
I think the Journal itself has a quite distinctive audience, as you can imagine, both by virtue of income and demography generally.
And it's difficult to imagine Facebook, Snapchat or anyone else replicating what is a unique audience.
I think that's what the team at Dow Jones are emphasizing a unique audience that's growing because of its unique quality content.
And the push for WSJ2020 is not only to improve the flow of news, but to make much more efficient the actual delivery of the content in ways that suit the contemporary user.
Generally speaking, at Dow Jones, as you said, digital revenues are growing, both in terms of advertising, circulation revenue is up around 6%.
And in terms of print this quarter, as I mentioned earlier, it's hard to give you a definite outlook for this quarter, but certainly thus far, the decline is moderating.
And just with regard to the cost savings that we mentioned under WSJ2020, we're expecting to take out $100 million on an annualized basis by the end of FY18.
<UNK> <UNK>, Deutsche Bank.
Hi, <UNK>.
Hi, <UNK>.
My question is around Foxtel, basically around the churn rate, which has remained around that 15%, 16% mark.
Do you expect that to decrease in coming quarters, as perhaps you get into more favorable comps.
And just on Foxtel, as well, you've obviously detailed the expected shutdown costs around Presto.
Will there be any [output] deals which will remain on foot that will also need to be renegotiated that may stay with the Foxtel platform and will continue to incur costs.
<UNK>, I handle the first bit of that question.
As you say, Q2 churn was around 15.6%, compared to 10.3% in the prior year during Q2.
Clearly, there are a lot of offers out in the market, no contract sales, which aren't necessarily more fluid.
Also, last year at this time, we had the Rugby World Cup, whereas you know, Australia performed unexpectedly well, which was obviously auspicious for some.
There is no Rugby World Cup this year.
But we're entering a crucial sales period for the key core winter sports, Rugby League and Aussie Rules.
And so over the next two quarters, we obviously expect to see stronger results.
But look, there are offers out there with the phasing out of Presto and the focusing on Foxtel Play, and it's certainly up to our team in Australia to prove to customers what we all know to be a fact, that the offering in sport and other programming by Foxtel is far superior to that of the competition.
I think in terms of the question you had on the Presto shutdown, look, we expect, as I said, for additional costs in the coming quarter.
We don't comment on specific output deals, but we have recently renewed HBO.
I think that was announced.
And the team there is keeping a very close eye on the costs.
<UNK>, <UNK> here.
No disrespect taken.
As you know, and as we've made clear to investors, we are in the midst of transition.
You can see what's happening to the newspaper business.
That's no secret to anyone.
And to someone as observant as you, that's certainly no secret at all.
As you also realize, we've made a series of investments and divestments, including Amplify.
So it is a company in transition.
We are seeing ---+ you asked about change ---+ the character of the company itself has changed.
It's based on the traditional principles that were the fuel to success for the old News Corp for many decades.
But it's also a company that's using that expertise, for example, in news and judgment and analysis to enhance its profile in digital real estate, which is now the fastest growing sector of the company itself.
And as you can tell, from both our numbers and our voices, we're optimistic about the expeditious evolution of that particular sector.
At heart, as we are, as we have always been, focused on long-term value per share.
And we are quite confident that over a period, that will become evident to all.
Thank you, <UNK>.
Katherine, we'll take our next question.
Just on News America Marketing, <UNK>, all I can tell you is that we are very pleased with the performance of the in-store sales.
As we've indicated, the freestanding inserts, which are themselves partly dependent on the newspaper business nationally, haven't been performing as well.
But our particularly strong position in in-store does indeed prove the potency of point-of-purchase.
And we're working with our partners in that area to further develop our expertise and dovetailing that expertise with the data and intelligence that we're harvesting from Checkout 51.
So overall for that segment, we're quite confident about performance and potential.
And just with respect to Foxtel, obviously we don't comment on the specific assumptions that we use, but we do expect Foxtel to improve as a business.
The management team there is working hard.
They have their target to improve [the stragglers] into the future.
Clearly, they've got some cost challenges and they're meeting those head on.
So I would say we're optimistic about Foxtel's future.
Katherine, we'll take our next question, please.
The Books business is difficult to forecast too long term.
But what we're very confident about is the broader strategy that <UNK> Murray and the team have developed for internationalization of HarperCollins through the purchase of Harlequin.
The ability that that gives us not only to take advantage of the front end, but also backlist books.
And secondly, as <UNK> has outlined, the current roster of books, which is performing particularly well and enduringly so.
Interestingly, we are seeing an uptick in digital sales.
And fascinatingly, part of that is due to the popularity of digital audio.
But as I mentioned earlier on, we are particularly heartened by the Nashville-based HarperCollins Christian business, which is generating a lot of titles which aren't matched by other publishers, given the orientation, and generating a lot of revenue.
Thanks, <UNK>.
Katherine, we'll take our next question, please.
Well, <UNK>, what I can talk about is the broad principle, which is harnessing the audiences that we have from our different mastheads and related real estate sites around the world, where you are in a verified environment, where the advertising can be authenticated, where advertisers are not embarrassed by the guilt by association that's clearly evident in The <UNK>es in London report today.
Many of our executives have been talking about the lack of veracity in digital metrics.
They are mad metrics.
And I think we are reaching a point where this awakening by advertisers is becoming a reckoning, which makes a verified environment of quality content with a quality demographic much more desirable.
And I'm fairly certain that advertisers will start to be more digitally discerning.
And while not going into too much detail about what our plans are at this stage, we're not quite ready to do that, but our plan is fairly well advanced, but we do believe that we will be the beneficiaries of that reckoning.
Okay.
Thank you, <UNK>.
Katherine, we'll take our next question, please.
We haven't given that sort of specific number out.
But I think we have said in the past that when we look at our capital expenditures, a significant part of the CapEx is IT-related.
And within that IT-related bucket, quite a lot of it goes into investing into digital products.
So even though CapEx is down year-over-year, the percent there that remains focused on digital is about the same.
So that's one way of probably thinking about the kind of investment we're making.
Now obviously, there's Op Ex costs in addition to CapEx.
But we don't generally break those out, but most of our Op Ex investments are being focused more and more towards digital.
Thanks, <UNK>.
Katherine, we'll take our next question.
Great.
Thank you, Katherine.
Thank you all for participating.
We'll talk to you soon.
Have a good night.
