News Corp is undergoing its most radical change since the split of June 2013 as digital subscriptions in newspaper and from the newly merged Foxtel/Fox Sports business becomes the most important revenue and profit driver, supported by the company’s growing digital real estate operations in Australia and the US.
From this quarter onwards, the company’s accounts and profit and loss account will no longer be dominated by the fading newspaper operation helped by the growth businesses in REA in Australia and Move/Realtor.com in Australia.
CEO Robert Thomson told the briefing that the Foxtel/Fox Sports merger means that from now on News Corp’s major revenue and profit generators will be subscription TV and digital real estate in Australia and the US.
That will see newspapers (the heart of the News and Information division and the company’s founding base), will be relegated to a distant third place in importance.
Thanks to the Foxtel/Fox Sports merger, News expects that from the current 4th quarter (ending June 30) more than half of its revenues and profits will come from its digital real estate services and pay-TV businesses as the company places more focus on recurring subscription-based revenues.
The forecast, made to an analysts briefing on Friday, came after the company reported better-than-forecast revenue in its fiscal third quarter thanks to its digital real estate business. But the company’s net loss for the period jumped to $US1.2 billion thanks to the already-announced write down of the News Corp’s investment in Foxtel ahead of its merger with Fox Sports and News move to 65% of the combined business.
That write-down was just under $US1 billion, with another $US165 million in write-downs at its News America business. Excluding the impairments, operating profit (on an earnings, before interest, tax, depreciation and amortisation – EBITDA) – fell 15% to $US182 million. The net loss means News will report a loss for the year to June 30.
News’ revenue grew 6% in the quarter to $US2.093 billion – CEO Robert Thomson said that was the strongest quarterly revenue growth since the News Corp split in June, 2013. But of that $US115 million increase, $US70 million came from favourable foreign currency moves in the quarter, with $US50 million of that in the revenues in the news and information business.
The news and information unit accounts for about 60% of revenues and saw revenues rise 2% (thanks to $US50 million in favourable foreign currency moves) from a year ago, while earnings dropped 31%, despite a 20% rise in digital subscriptions at The Times, Sunday Times Wall Street Journal and The Australian). More important though was the continuing surge News’s digital real estate services (REA in Australia and Realtor.com in the US).
They contributed nearly 13% of group sales, but saw revenue leap 27% year-on-year. And the 17% rise in earnings in digital real estate saw it overtake news and information services as the biggest contributor to EBITDA. And when the Foxtel/Fox Sports merger kicks in this quarter, it will become the largest contributor to EBITDA and subscription revenues, changing the balance of News’ finances.
Across the business advertising revenues continued to slide, down 3% year on year, and again attributed to weakness in the print advertising market as well as the company’s decision in the second quarter to cease the Wall Street Journal’s international print editions.
Favourable foreign currency made the fall in revenues look better than it was – in Australia ad revenues were down 9% in local currency (the worst performance across the group) and 5% in US dollar terms. Revenues rose in the UK and at the Wall Street Journal.
But circulation and subscription revenues rose 7%, though, to $US659 million around $US28 million short of overtaking advertising revenues (circulation revenues in Australia were steady).
That’s an echo of what has happened at the New York Times where subscription revenues from all sources is now the single largest revenue area. When the Foxtel merger becomes operational from the current quarter, circulation and subscriptions (including digitals subs from the newspapers) will become the largest single source of revenues for News.
Chief Financial Officer, Susan Panuccio told an analysts briefing that News Corp Australia had easily achieved last year’s $US40 million in cost cuts in the first 9 months of the year and “the team down there” was actively looking for more efficiencies.
She said the team at News Australia were looking at all aspects of the business, back office, distribution, printing,“getting rid of legacy systems” and “antiquated practices”.
She said the cost cutting would continue at News Corp Australia because it is more dependant on print advertising revenues than elsewhere. In fact her comments about cost cutting only mentioned Australia – the UK and US operations saw no discussion.
Both Ms Panuccio and Mr Thomson made it clear that News was “reviewing its portfolio” of assets in Australia and while both wouldn’t comment on ‘future actions’ they made it clear they expected developments. Ms Panuccio said “we are always looking to simplify the portfolio’”And seeing she is the former News Corp Australia finance boss, she speaks with some authority.
News Corp Australia CEO, Michael Miller said in late April that the company is in discussions to sell some of its local and community newspapers. She also said that News was actively looking globally at printing and distribution efficiencies.
When an Australian analyst mentioned talks with Fairfax, Ms Panuccio didn’t deny that, but wouldn’t say anything more except to point out that news had had success in sharing facilities in the UK and was looking for similar situations elsewhere.