News Corporation (NWSA) Earnings Call Transcript & Summary

Thanks for joining us for this session. And hopefully, the timezone is a little bit friendlier than where it is down here in Australia. So I'm Kane Hannan, the firm's Australian telco and media analyst, and I'm pleased to be joined today by Robert Thomson, CEO of News Corporation. Robert, thanks so much for joining us today.

Kane, thanks for getting up so early.

So obviously, we'll leave some time for questions at the end. But maybe just to start, Robert, obviously, 2020 has been a pretty unprecedented year given the virus. Just talk a little bit about how News Corp has responded to virus, where it's had the biggest impact on your business and I suppose how we should be thinking about the News Corp that emerges on the other side.

Yes. Kane, obviously, we're all traversing rather unusual terrain, uncharted territory, professionally and personally. But I have to say, first of all, I'm particularly proud about our employees around the world and the way that they've responded, whether it be the fortitude of those in the early days at our book warehouses, where working from home is obviously not an option; to -- or our journalists who've done their very, very best to inform the world, particularly at a feverish time for journalism; or those employees who've overcome understandable apprehension. And all those many, many thousands of our people who have contributed to their communities in ways both seen and unseen, but in ways that have made a genuinely positive difference to their societies. Now as a company, we've obviously accelerated the simplification of assets and increased transparency, most obviously by the resegmentation that has created a separate Dow Jones line. I mean that naturally increases scrutiny, which is a good thing on that business, but also on our other news media businesses, which is our sign of confidence in their ability to transition successfully in the digital age. Overall, COVID aside, it's a very different company to that which was created at the time of the spin-off. We sold Amplify, the digital education company. We sold a local newspaper group in the U.S. quite early on, which was a fortuitous thing to do. We sold Unruly. We've sold News America Marketing. We've clarified the ownership of Foxtel. We acquired Harlequin and realtor.com, which, by some reckoning, has made us the largest digital real estate company in the world. And there have been some difficult decisions and part of them, in a sense, expedited by COVID. But we've closed the print editions of many of our regional community papers in Australia. The sale of AAP, the Australian NewsWire, created by Sir Keith Murdoch, Rupert's father in 1935. And yesterday, we announced the planned closure of our New York print plant. And obviously, these are not decisions taken lightly, superficially, but are necessary, and the onset of COVID has proven the importance of that strategy. And as you can see from our Q4 results, our performance has been very different to that of other media companies. Our cash balance is actually stronger. It increased $129 million in the fourth quarter to over $1.5 billion. And cash is crucial at a time like this. And our other cost reduction programs have started to kick in. And our ability to generate revenue through digital has improved markedly, whether that be digital subs or digital advertising or digital real estate or e-books. Now I'm not sure it's right that we would call a pandemic a cyclical factor, but it's the ultimate stress test of a business. And our employees and our executives have handled the crisis with integrity, with sagacity and with empathy. That was obvious in the fourth quarter results, as we indicated on the earnings call. And we were pleased with the team's performance in the first weeks of the quarter, and it's fair to say we remain pleased with the team's performance this quarter.

Maybe then looking forward sort of the next 12 months, how do you think about the main priorities across the various business for news?

Well, really, each of the sectors has its own challenges. Opportunities, it's not really a word you particularly wanted to use during a crisis. But the impact of the virus on companies is similar to the impact of the virus on the human body, it exacerbates preexisting conditions. It exploits vulnerabilities. And so you've seen many of the businesses that have either struggled or prospered are doing so because the virus is a digitally compressed evolution, and that's the challenge that we face. And so the speed of change, the -- it's a period to make changes and to adapt rapidly to change. And we've had to make some difficult decisions already, had a 12% reduction in head count at news media, 70% reduction in head count at Foxtel, but they will certainly not be the only changes. And at the same time, simplification, which we've spoken about quite openly, it does not mean dumbing down. It's -- we're not bowdlerizing the business. Simplification means shaping up for the future because we know historically that we've been a complicated mix of companies. And there was always a certain merit to that eclectic mix, but it's absolutely clear that the complexity has been a barrier to investors understanding the true worth of our assets. So simplify it, we must. And there has, in part, been a misperception that we had fields populated by sacred cows, that certain properties would be indulged eternally, and that is not the case. There is obviously a special purpose to what we do, whether that be our journalism, our books, our creating a more transparent market and digital real estate and informing families ahead of what, for many of them, is the most important investment decision they will ever make, buying a home. But we all understand that if you can't make the business profitable, then the purpose is unsustainable, which is why we sold Amplify, why we turned, as you know, about 112 of our Australian newspapers digital only or sold them or closed them. And with -- what we've been able to do, for example, by taking dramatic decisions, which we'll go on taking, is for example, put the New York Post on a firm path to profitability. I mean there's been a dramatic turnaround in its numbers. And we hope that, that process of simplification will just make it easier for investors to appreciate the intrinsic worth of companies like Dow Jones, which we obviously have an Investor Day for early next week.

Maybe obviously, just picking up on the simplification comments. It's something we do get asked a lot about from investors. So just interested in your thoughts. I suppose, where you see the complexity in News Corp today after the changes that you've made.

Yes. Well, part of it is deciding what our core business is, but part of it is actually clarifying our structure. All companies, particularly those of pedigree and providence, have complicated structures, which may sometimes limit their flexibility and stifle simplicity. So in fiscal 2020, we completed a corporate restructuring in Australia to simplify that structure, which had, over the years, developed complex intercompany relationships. So now we have aligned reporting with our segments, Digital Real Estate, Subscription Video Services and Publishing. Now this simplification may, of itself, sound simple. But it was rather time-consuming and required all the necessary regulatory approvals. But we now have a very clear structure, a simpler structure and absolute optionality. And so the simplicity drive has been twofold: one, to make sure that the core businesses are profitable and to reassess which is core and noncore; and two, within the company itself, to simplify structures. Part of that was the work done in Australia, which was profoundly important work. Part of that is, for example, the appointment of Tracey Fellows as Global Head of Digital Real Estate, which we realize is an underappreciated asset. We don't get the full value of REA in our share price. And by appointing Tracey, we are sending a signal that: one, we're conscious of that; two, that Digital Real Estate is core because of its complementarity with our media businesses; but three, it will have the clarity of focus upon it.

Maybe then just talking about Foxtel for a little while. It's obviously a business that's in a bit of a turnaround phase. So just interested in your thoughts, Robert, around -- is it realistic to think that we can stabilize the revenues on that business in the next few years? Or do you think that record cable headwinds are just too meaningful for Kayo and Binge to offset from you?

For those who don't know, Kayo and Binge are our streaming services in Australia. And -- but the signs from our streaming strategy are indeed positive. There has not been the feared spin down from broadcast. And we are indeed managing to maximize the value of our preexisting rights, whether they be entertainment rights or sports rights. And we've reset the cost of those rights, and we've reset the cost of the business with the headcount reductions. As you know, already against contracted value, we will save at least $180 million on the existing sports rights over the next 3 years, and there are further negotiations to come. And so they're a combination of factors: increasing audience, where we topped 1 million streaming customers for the first time; high ARPU, Kayo is AUD 25 a month. It's not a AUD 7 or a AUD 9 a month product. Obvious sectoral shift in customer preference towards streaming, which clearly we have to respond to and have responded to. And we've always looked for optionality and stability in Foxtel. And Patrick Delany and Siobhan and the team are doing a sterling job in getting that stability and creating that optionality. And as we've indicated in the past recently, that we see no reason for any extra investment from News Corp into Foxtel. We see it now is on a course that -- towards the increasing revenue and increasing profitability that we've been looking for. And it's a testimony of itself to the hard work of the team and the wisdom of the strategy.

And so maybe just around sort of the cost comments at Foxtel. I mean, obviously, we're talking about $100 million reduction and the 17% head count you spoke about previously. I suppose the question is, I mean, how do you make sure those OpEx savings don't have a revenue impact, a spike in churn or just a loss of customers from lost programming, for example?

Well, we've been very careful to prioritize our programming needs because we're in a very odd period and not just in Australia around new programming because production has been disrupted as a consequence of COVID. But there's no doubt the sports rights that we've been able to acquire for the long term have given us, in the realm of sport, a very, very strong position, which we're leveraging. There's no doubt that the recent big deals that we've done for extended program with Time Warner are also necessary for a successful streaming business, but give us a unique position in the Australian market, given the quality and exclusivity that comes with a deal like that. So yes, you do have to prioritize the programming that you acquired. But I think the team have done a very good job of establishing a hierarchy of importance, and that hierarchy reflects the uniqueness of the content and the value to existing and potential consumers.

Yes. And then I mean I'd be interested how you guys are thinking about your relationship with sporting codes. I mean, as you said, you've extended the NRL deal for any period of time. You've renegotiated with the AFL. Cricket is still outstanding sort of in the press down here at the moment. How do you think about this relationship? And I suppose, how important the sporting codes to the Foxtel business model?

Look, there's a realism in Australia about sports rights. And the sports themselves have generally, generally become conscious of the value of media partnerships and are aware of the danger of not having those partnerships. So it's an existential moment for some of the sports, given their own cost base, and that is definitely a COVID consequence. As you know, we've extended our Rugby League deal in Australia. And it's -- actually, it's -- these things are not just about the quantity of matches, they're about the quality of the experience for our customers. And we all know which teams are the big drawers and the importance of exclusivity, and that is -- for us, is a big factor. Not just how much we spend, but the quality of the relationship we have with the sport and how the sport understands our needs. That is a big factor in us determining how deep the partnership should be and how extensive, more broadly, the commitment from our company, including our media partnership. And you can see the way we devote reporting resources to covering sports, the way that we promote upcoming events. That's important for the sport. It's important for us. But if we don't have a full, holistic partnership, then why would we commit those sorts of resources. So in general, there needed to be a reset in sports right cost. In Australia, there has been a reset, and that reset is still in motion, and there is no doubt it's to the benefit of Foxtel.

So it's something you have spoken about in the past around, I suppose, the Foxtel IPO. Obviously, we weren't expecting COVID to come along when we were talking about that. But how do we think about time lines or intentions on, I suppose, the outlook for Foxtel and what you guys would want to see before we would potentially look at revisiting something like that?

Well, particularly in the midst of a pandemic, it's a little difficult to speculate about outcomes at this stage. But all I can say is that the -- Foxtel is very much on the track that we want it to be on. The team is doing an extraordinary job. In the past, we've had problems with product launches. We've had problems with handsets. We've had problems with set-top boxes. The current management team is introducing, for example, Kayo, which I'm sure you've looked at it, is a very complicated, very sophisticated state-of-the-art international product, and it works and works and works really well. And they're the sorts of things that we needed to get right if we were to have the optionality that we are certainly heading towards having.

Yes. Suppose then, just Dow Jones, I appreciate you've got the Investor Day next week, so we won't spend too much time talking about it. I suppose just given the importance to the news business, are there any comments or key things you can share with us this evening that might shed some light on what we will be talking about next week?

Well, look, I don't want to spoil the surprise, so the big reveal will have to be next week. And I invite everybody on this call to tune in because it will be an important day because Dow Jones for us is an important company. And you -- let's just say that Dow Jones and The Wall Street Journal stand up favorably in any media comparison. Revenues improved last fiscal, which was a testing year. And EBITDA was 13% higher despite the difficulties in print advertising, for example. I mean digital revenues were over $1 billion at Dow Jones and 60% -- 67% of total revenues. And the new leadership team under Almar Latour, who will be introducing the Dow Jones team early next week, and who had done himself an important job in transforming Barron's and MarketWatch, and he's -- Almar is already making positive changes. I mean it's fair to say that Dow Jones is the world's leading news media company. It's the first to do a deal with Apple, Apple News+. It was the first to craft a deal with Facebook. Its influence is unparalleled. And it's -- in an age in which some journalists have decided to become activists, journal journalism -- Wall Street Journal journalism is still the most trusted by some way in the United States. The Wall Street Journal is repeatedly shown to be the most trusted masthead in America and is trusted on both sides of the aisle. And that integrity and that trust are absolutely priceless.

Obviously, I want just one last question on sort of Dow Jones. But just -- you obviously had some phenomenally strong digital subscriber growth in the fourth quarter, sort of 23% from memory. And so given that growth, how penetrated do you think you are in the addressable markets, I suppose? And how do you think about the strategies for continuing to drive that readership higher from here? I promise, I won't ask anymore.

Well, the vast majority of that audience is in The States. And even in The States, we believe the total addressable market is significantly larger. I'll leave it to Almar to reveal some figures. But that -- the audience we have now internationally is relatively small. And a reason for appointing someone like Almar is his background in Europe, his background in Asia because we do sense that not only in The States but well beyond the borders of the United of America, there are opportunities. And it's a time at which -- not only in business coverage, but also in the general news coverage, which is why we did the Apple deal because we wanted to get access to it, to a group of potential readers who may not have thought that The Wall Street Journal was a paper for them. They may not have realized that it covers politics, it covers national news foreign news. It has great lifestyle coverage. The best arts coverage in America, obviously, brilliant opinion pages. But that audience, for the first time, sampled The Wall Street Journal. And while some papers and some news organization talk about a Trump bump, we talk about a trust bump, that there are more people coming into The Wall Street Journal because they want integrity. They want honesty in their news coverage, and that trust bump is something that was -- is still, I think, at an early phase of the curve and will bring in more readers in The States and around the world.

And obviously, news media, obviously facing a few more challenges than Dow Jones. I mean, just interested if you could talk a little bit more about those cost initiatives. Obviously, seeing the Bronx sort of printing plant closure come through. How do we think about the outlets in news media and then sort of the return to profitability?

And the resegmentation, as I said earlier, is a sign of our confidence in the future of the news media business. And we know there's going to be extra scrutiny. We know that there is more transparency and with transparency comes a need to perform. In terms of costs, there are 2 tiers of cost reappraisal. One is the internal iterative process. And the other is the broader, more substantial shared service program, which we've spoken about publicly, which will really fundamentally change the character of the company and increase profitability at news media. And The New York Post really is a paragon. It's no secret that the paper has lost money for a long time. In some years, fair to say, substantial money. But that paper is firmly on track to profitability. And the printing plant closure announced yesterday was a difficult decision. We've been in the Bronx for 2 decades, but you must make difficult but necessary decisions if papers and the news media sector generally is to prosper. And look, I would like to pay a tribute actually to the many generations of workers through the years who have made a contribution at the Bronx to the company and to society through their toil. They have, in their own way, played an important role in crafting an informed society, and their contributions will continue to resonate for many, many decades to come.