News Corporation (NWSA) Earnings Call Transcript & Summary

Good morning, everybody. Welcome back. We are in day 4 of Morgan Stanley's Virtual TMT Conference 2021. Thanks for joining us. Quick disclosure statement. For important disclosures, please see Morgan Stanley disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Really excited to welcome to the conference. Welcome back, Robert Thomson, the CEO of News Corporation. Robert has been leading News Corp since 2013. Prior to that, served as Editor in Chief at Dow Jones; and was the managing Editor of The Wall Street Journal. Robert, it's great to see you this morning. Thank you for being with us.

Pleasure to be here, Ben.

So there's a lot going on in your world, lots to get through. Maybe I'll open it up, give you a chance to talk about what you think is important and really what you're focused on in terms of driving growth at News Corp as you look out from here?

Yes, look, it's certainly a time of motion turbulence around the world, a stress test for companies and countries. And first of all, I'd like to pay a tribute to our employees and the enduring culture of News Corp. Goethe sagely said, "the character is constructed in amidst of tempests". And we are certainly in amidst of a tempest. And his observation is definitely validated by the valor of our team partners. In amidst of the tempest, we have, as a company, been performing admirably. The second quarter, it was the most profitable quarter since the News Corp's launch, as you said, more than 7 years ago. It was the largest profit for Dow Jones since the acquisition of the company in late 2007. Subscription EBITDA, we saw a 77% increase in subscription services, video services, their EBITDA, 92% increase in our streaming audience. And so there was a record increase in profit in realtor.com, which accounted for about 80% of that segment's EBITDA expansion. And when you combine digital real estate services, HarperCollins, Dow Jones, they collectively generated EBITDA growth of close to 40%. And history was certainly made when the New York Post reported profit for the year-to-date. Certainly, the first profit in modern times for a paper founded in 1801 by Thomas Hamilton. Hamilton the newspaper is not yet as profitable as Hamilton the musical, but it's certainly on a positive trajectory now. As you know, and many people in this conference realized, we recently announced the global content deal with Google. We're still haggling with Facebook in Australia and the U.K. But I do have to say that Google team's response since that agreement has been excellent, and our teams are jointly working to create new content sets across finance, audio and video. And the best way to look at the agreement, which Sundar Pichai, the Google leader, definitely navigated or negotiated is to see it as a reset and a platform on which our content partnership will be built. Now as for our company, we're obviously committed to a shared services project that, whether it be procurement or technology or office space. It's obviously that we simply have to make the most of our investments to end duplication, to intensify the sharing of both successes and, frankly, a few failures. That's the kind of culture you want to create, a one of shared experience. And we're a company of many parts. And while we're set on a course of simplification, we still have to be more than some of those parts. That shared service project, we call News Next, which of itself is generating thoughts and interesting ideas about the simplification of the company. And as you saw with the resegmenting of Dow Jones, the more transparent we can be, the more the investors can appreciate the trajectory of that company. And they like what they see, understandably. And accountability involves accessibility.

Well, that's a good intro. Maybe before we dive into the Google-Facebook discussion, which obviously is a big topic, Robert. I feel like ever since News Corp sort of became its own stock, that one of the debates has been around simplification of the portfolio and maximizing value. You touched on it just there, but maybe more broadly, can you talk about the progress you've made and -- on this strategic initiative and what the next kind of key steps are for the company to unlock value and simplify the portfolio?

Yes. Well, look, obviously, we're a very different company now to the one that was reincarnated in 2013. And the pandemic itself has prompted introspection, every institution has to be introspected at a time like this. It's a catalyst for contemplation. And what we found during the pandemic, quite obviously, is that we are quite evolved because clearly, digital companies tend to fare better than nondigital companies. Now that's not in the slightest to be complacent, where only a small way down that digital journey, but that has obviously have been reassuring for us and clearly reassuring for investors. You can see the potential: one, in what we've created; and two, what we'll inevitably create. But you have to recall that if you look back to that formation, we've sold of Amplify. We sold off to very early on with the troubles of regional newspapers imminent. We sold the local media group from Dow Jones. We sold NAM, we sold Unruly and we -- in Australia, we took the dramatic but necessary step to convert most of our local and regional papers to digital only, which was a historic step really. That of itself led to focus and simplification. So we've also sorted out a very complex corporate structure in Australia. So there is a much clearer distinction between publishing, real estate, digital real estate and subscriber video services. And that of itself, that clarification gives us a foundation for further simplification.

That makes sense. I'm sure we'll talk about a lot of those businesses in this conversation. But let's go back to this Google-Facebook process that you've interact -- feel like you've come to this conference and talked about what you'd like to see happen for years and years. So I'm sure it's quite gratifying where you've landed. But what are the implications both for the News Corporation and really kind of the global industry as you now sort of sign these and move forward with these companies as partners?

That is a good question. The profound consequences. And profound is probably euphemism in this context. As you said, it's -- for myself, for Rupert, for Lachlan, this has been an important, a passionate cause for a very long time. I first gave evidence on this subject in 2007 to the house of Lords when editing The Times of London. And so it has been indeed long March. In fact, much longer than a long March, the actual long March was only 1 year and 1 week. This is a much longer period. And it is certainly akin to retrans. So it's retrans, revisited, retrans 2.0. I think it's been called by some sage souls. And it does mean the terms of trade for content are changing fundamentally. And without being too Churchillian about it though, it's just the end of the beginning. And it's interesting, people have asked what was the source of motivation and business people for many years have quite fashionably chosen to focus on Sun Tzu and the Art of War, or Bushido or some elegant elliptical haiku. I think you can do no better than to focus on the words as a magic of Maya Angelou, which is, never make someone a priority when all you are to them is an option. And so clearly, my advice, having been on this journey to businesses generally is make it a priority to make yourself a priority. Now I can't tell you the precise financial terms. But you will already have seen in the very good Dow Jones numbers in Q2, some of the impact of earlier deals with Apple and Facebook. And you'll see the continuing impact of -- overtime of the ensuring deals. And it isn't just about News Corp, and particularly the Australian media code, which I'm sure will be self made manifest in other countries in one form or another. It's also about providing some negotiating leverage for smaller partnerships because you don't change the landscape with a single deal for a single -- a single company. And that's important. And as for Google, it is a very textured, very thoughtful deal. It's one where they're establishing what their content priorities are, and we're learning a lot from Google at the moment. And we're going to work to develop new content to the text to audio, what type of video works for them. The importance of audio for YouTube, for example. And we're also working on things like subscription mechanics. There's a revenue share deal on the ad mechanics. And it's important. It's important for us. Without being too pompous about it, it's important for societies because don't forget that in the past decade, about 40% of professional journalists in the U.S. have lost their job. And journalism has to be sustainable for society to be healthy. So I think the reassuring point I would make to sum up is that the fourth estate is about to get a second wind.

Remind me never going to get into a quote battle with you, that would be a losing proposition. Let me ask you about Google in particular. Google News has been around for a while. Google is an unbelievable source of traffic for everybody in the publishing business. They've now sort of introduced this showcase, or starting to introduce this showcase product, which you guys are going to be a part of. What do you expect from that? And as we move beyond this initial agreement, what are these partnerships going to do for the business over the longer-term in your view?

Well, there's a fundamental reset. On the revenue side, it is retrans revisited. On the content side, it's understanding what contemporary content looks like. Now the challenge for us, for our business teams, for our journalistic teams is to make the most of that opportunity, to have e-empathy, to focus specifically on how people are accessing content, have been it clearly digital, clearly more and more mobile. But what does it look like? Because if you phrase a frame of digital evolution and just focus on that, then you're very quickly behind the times. And so having an institutional intuition is imperative. And by working closely with the Google teams, having the privilege of that proximity, we are getting a much better sense of what that content landscape will look like in the future. You have to anticipate it. Because it's -- if you're institutionally intransigent, you quickly get overtaken by events. And so it's partly how we respond to the challenge that they are giving us. But it certainly helps to have the partnership, and frankly, it certainly helps to have the money.

Yes. No question. And you've had a relationship with Apple for a while. You said you're haggling with Facebook still. Do you think all these 3 will be distinct in how you operate and partner with them over time? Or do you see them coalescing around a standard model?

Three different companies, each with their own personnel. I mean, they're extraordinarily successful companies. Each of their leaders is an extraordinary individual, done remarkable things. And understanding -- that's a really good question. You have to understand the distinction of their priorities because they're not exactly the same. What is the Apple app environment going to be in a few years' time. With Facebook, the news term, how does it differ from conventional Facebook News presentation? And then how -- also, how could you build on that with multimedia content? So it's not just text, obviously. And each of them is getting into different devices at a different pace. And with each device, there's an opportunity. Now there are challenges because you have to be very -- as we've tried to be with the Apple deal in the past, with the Google deal more recently, you have to be very conscious about the relative rights of content. Just because you buy text doesn't entitle you to audio, for example. But those are the arguments we should be having. And they're healthy, they're partly intellectual arguments, they do have commercial meaning.

Yes. Well, we could talk about this for a long time, but let's move on to Dow Jones, the business in a little more detail. How would you size up the performance of that business over the last few years and compare your strategy as you look to grow that to what we've seen for maybe the New York times as we look at these sort of 2 digital publishing leaders going forward?

Yes. I'm a little uneasy with the comparison to New York Times because there's really no comparison between the composition of the 2 companies, not even the scale of the 2 companies. So they don't have the world's many measures, the world's largest digital property company or the greatest book publisher or the leading Australian subscription video service company in their portfolio. So -- and dare I say, without being too hubristic about it, the sort of any fight over statistics or metrics with the Wall Street Journal tends to be an unfair fight in the sense that in the last quarter, Dow Jones improved EBITDA by 43%; at the New York Times, it was 1%. But the margin of the Dow Jones was 24.4%, but the margin of New York Times, 19.2%. Overall advertising at Dow Jones, this is pandemic affected, clearly, but it was a mere 4% lower. The New York Times was down 19%. And digital advertising at Dow Jones was up 29%, well, it actually fell 2% to New York Times. And we -- look, we see growth potential, not just in the U.S., but globally. International subs at the moment at Dow Jones are a mere 15% of the total current. The team is very much focused on that. And look, as you know, we have a thriving professional information business there. The risk and compliance business revenues rose 21% last quarter. That's 22 consecutive quarters of double-digit revenue growth. And you know with the new administration in Washington that there is going to be a focus on risk and compliance. So that's -- may not be great for businesses, it's good for our business. And it's also fair to say that we don't have the unsettled environment that you see at the New York Times. We have a great leadership team at Dow Jones, Almar Latour and Matt Murray being the Editor in Chief. They get on very well. And they have ambitious editorial and commercial plans. And frankly, they took me through those plans yesterday. And they are indeed a dynamic duo. And having seen those plans up close, there's a lot for readers to be excited about, and there's a lot for investors to be excited about.

That's great. What's your outlook for the advertising side of the business because we've generally been hearing, through this conference, a reasonable kind of cyclical tailwind, what's going on from your point of view?

We did indeed have a reasonable Q2, and there's nothing to suggest in Q3 that it's very different, that a reasonable scenario. Look, it's -- I'm not sure the SEC encourages too much prognostication and haruspication is beyond me. But we certainly have strong digital growth across our properties. In Q2, as you will have noticed, the trends improved in the U.K. and Australia and at the newly profitable New York Post. We got digital advertising at 64%. And what we're doing, in addition to selling hard in the here and now, is preparing for the evolution of the advertising market because it's clearly undergoing structural change. And what is generally referred to as the death of a cookie is clearly going to be an important moment. And where we have a tremendous advantage, in media terms, an unfair advantage against our competitors, is that we have an ability to aggregate audiences. For example, in the U.S. at the Wall Street Journal, MarketWatch, the New York Post network with realtor.com genuinely give us a unique scale. And we're using insights now from that audience to find sectors cohorts with shared interest. We can tell if a reader is looking at New York Post or mention stories about real estate, and we can introduce that cohort to REALTOR. And there are plans that we've been fashioning, perfecting over the past few years and are about to come into their own at precisely the right time. And just to give you a sense of that scale, by our internal reckoning in January, Dow Jones, including WSJ and MarketWatch, had about 110 million monthly uniques. REALTOR about 94 million monthly uniques. And the New York Post network, 151 monthly uniques. And -- but the art of this is to be more than the sum of the parts. Because when you do that math, that's a considerable audience, and you need that size to be successful in the advertising market that's coming.

Yes. Speaking of size and scale, we're all on this side of the investment community, trying to figure out the opportunity in digital subscriptions, sort of the never-ending quest for what is the TAM. When you think about the runway for you to keep growing your 2.5 million digital-only subs, I think, over 3 million total. What's your perspective on the opportunity in front of you there?

Well, focusing specifically at Dow Jones, what we perceive to be the total addressable market is around 90 million. And we've just started a premium service for MarketWatch and well over half of those new subscribers are also signing up for Barron's. And that's really one of the key strategic imperatives for us at Dow Jones, one we've been focused on for many years. Once you sell a system, how do you upsell to higher yield products? And again, with that infrastructure in place, we are able to take advantage -- and it's taken a few years to put it in place, but we are able to take advantage of incoming subscribers to maximize, well, their reading experience, hopefully, providing them with wisdom and insight, but for us to maximize our revenue experience. And at the end of Q2, we had about 4.03 million subscribers. Majority of them, vast majority of them are individuals. And the average age, reassuringly, is coming down. Over the past 4 years, it's fallen from 56 to 49, even with longevity, increasing longevity. So churn is lower. The average pages viewed per subscriber is higher. And most importantly, the philosophy has been proved correct. In that premium content deserves a premium and subscribers understand that equation and actually advertisers understand that equation. Because a chain cohort is a buying cohort.

Sure. And engaged as well. Why don't we turn to real estate, that's an area that I think investors are highly focused on. What's your perspective on the residential property market here as we hopefully emerge from COVID? And the growth trajectory at Move, which is obviously a business that's really started to accelerate.

Yes. Look, the unique users at REALTOR in January were up 37% for each month for the past year. We've been outpacing below 90 in the past 21 months, faster audience growth. And to be honest, we still take the core view that either you are a digital marketplace or are you in the market. Our aim is to be a genuine digital marketplace, not to have any vested interest that might complicate that. As you know, with house flipping, Zillow is renovating homes. Zillow is worrying about which pastels sells to put in the kitchens on the wallpaper. What appliances to bidet or not to bidet, as Shakespeare might not say, in the bathroom. And we'll leave the unkempt gardens and the ruptured paving stones to Zillow because the revenue may seem higher, but actually, it's not really revenue, it's turnover. What we're focused on is real revenue and real profits. And you've seen that time to pass made manifest in the last 2 quarters. For the broader market, existing home sales, now the National Associates of REALTORS estimate 24% or higher in January. For us, lead-gen referral revenues were up 30% or more in the second quarter. And clearly, interest rates are going to remain low for the next few years. You can speculate, pontificate about imminent inflation, but imminent means, is it 3 years, is it 4 years? And so there will obviously be a resurgence in the real estate market when people are allowed to inspect homes firsthand. It's one thing to view online the growth. That's the start of the real estate relationship, but actually visiting homes, understanding locations is important to families. And it's particularly important to families now as they reconsider their circumstances either to renovate, to enlarge, to move to another house in that area, or to move to an entirely different area. And where we're fortunate is that there's a real complementarity between the referral and the lead-gen wants where the lead is of the highest quality, it really is naturally a referral. And it's clearly worth more to real estate agents, to realtors. And where it's not just curiosity, it's a commitment. It's -- the other leads are worth a tad less, but they're still immensely valuable because that woman or man is in the marketplace, and they're about to make a profoundly important investment decision. And clearly, for example, with our partnership with Rocket Mortgage, we have leads that are valuable to them. And there are other adjacencies apart from mortgage, whether it be utilities or processes or products that are part of a house move, part of house renovation, part of what ultimately is the most important investment decision that any family will make.

Yes. It is a highly competitive market, and you touched a little bit about the -- contrasting your assets with Zillow and others. But anything else you would highlight in terms of what differentiates your product and your marketplace versus some of these large competitors in the U.S. in particular?

Well, it comes down to user experience, both for the realtor, for the vendor and for the potential purchaser. And so we're absolutely focused on that interface, making it providing information. If you look at REALTOR, you find a lot more economic analysis based really on our origins DNA and news because you wanted to be a holistic real estate experience. But you don't want to be confusing yourself with the contradiction of are we providing real estate services to people selling homes? Or are we selling homes? And so I think there's a clarity of purpose at REALTOR. And the relative comparative advantage of that clarity of purpose, I think we're starting to see in the marketplace.

Yes. Got it. Let's shift to the subscription video service. I'd love to hear your perspective on the growth opportunity ahead and strategy at Foxtel and how you're thinking about investing in OTT as that market evolves?

Yes. Well, you know the company well. So you're aware that at Foxtel, the streaming service numbers are up 92% in Q2 compared to the previous year, which is a fundamental change in the character of the business. And it's now 40% of the subspace and clearly, that relative ratio is going to increase. I think an important part of streaming is having the product to stream. And so we renegotiate our sports rights in amidst of the pandemic, and now have long-term agreements in place at reset rates for both Australian rules football and Rugby League, which are the 2 big sports in Australia, for those of you unfamiliar with Australian culture. And we're getting much better at understanding churn that the leadership team, Siobhan and Patrick have spent a lot of time in recent years of building up a sophisticated database using insight and clearly, artificial intelligence to really get a better sense of churn vulnerability, and something like that takes foresight. The project started a few years ago. It's coming to maturation just at the right moment when you are seeing some migration between one streaming product and another streaming product, when you're trying to maximize longevity of subscription. And so how many subscribers to be in suspicions, which is the entertainment streaming product, also one Kayo, which is a sports streaming product. And the other area in which the team has really done an expert job because I know there were concerns about this particular issue is ensuring that the spend down from broadcast has been kept to an absolute minimum. So we've increased the total number of streaming subscribers with very little impact on that call broadcast audience. Now it's up to us to show you that broadcast audience, why that's a premium experience at a premium price. But we're now entering a crucial moment for Foxtel because having built up that streaming service, our partners at Telstra had a product Live Pass, which was the digital rights to mobile rights to the 2 main sports, which they are phasing out and migrating those Live Pass customers across to Kayo. Now Live Pass has about 3.2 million users. Our best estimate that is only about 10% of those currently have Kayo. So the potential opportunity for us over the next 12 months in building up Kayo's user base quite significantly. It's a real opportunity. It's a challenge for the team. I have no doubt that the leadership term in Australia is up to that challenge. And if you think about it more broadly, the narrative around the Foxtel has changed so fundamentally in the past 12 months, and we were being asked, when are you next going to have to pull money into Foxtel. And we don't get asked those questions anymore, simply because the second quarter EBITDA was up 77%. The cost discipline, the promise reset on sports rights, the growth of 92% in streaming customers, as I mentioned, and what is the confluence of those very positive trends means? Well, it gives you optionality. And that's what we know have at Foxtel, and it's a tribute to the team in Australia.

Yes. You can see them making the pivot. Maybe in the few minutes we have left, Robert, I wanted to just hit quickly on Book Publishing, had a great year during COVID. It's also an industry that's got a lot of consolidation activity around it. So maybe you could just talk about your perspective on that business going forward as we exit COVID and the growth prospects? And also, if you're -- if this is an area where you think consolidation would help create value? Something I know we've talked about in-person in the past.

First of all, the leadership team at HarperCollins deserves much credit. Revenues were up 23% in the second quarter; EBITDA, 65%; digital sales, 15% higher; 21% in ebooks; 10% in audio books. It's interesting to say the ebook has come back into fashion after a couple of years of relatively sluggish sales, to be frank. And it does show that the core business there is robust. As you know, you have the Bertelsmann acquisition of Simon & Schuster pending. Now that obviously is dependent upon what I suspect will be a very stringent regulatory review. The price that at Bertelsmann is proposing, would seem to me to at least in my -- from my naive perspective, to be as much buying market share or market dominance as it is to be buying a book company. Look, there are certainly synergies in the book business, there are opportunities in the book business. But I have to say, when you look at the HarperCollins performance, we're very happy at the moment with HarperCollins as it is.

Got it. And maybe lastly, before we run out of time on capital allocation, always a favorite topic from investors. How do you think about putting cash to work in the business? And how do dividends and buybacks fit into your view as we hopefully come out of this pandemic and have some economic tailwinds behind us?

Well, I think you raised a very good point there in that question. There is still a certain amount of uncertainty in the world economy and for world health, frankly, we're never quite sure whether there'll be a new strain of the virus, whether it'll be a resurgence. And no individual, no company or no country can afford to be complacent. And we have to factor that uncertainty into our scenario planning, particularly on capital allocation. But it's fair to say that we are constantly and consistently reviewing our capital allocation and our capital returns policy. And it was -- look, it's certainly imperative during the first phase of COVID, to balls track cash position, given that volatility and uncertainty. And we've certainly done that. And you can see the impact on our cash reserves are not to have been disciplined, would have been to have been reckless, even derelict. And so we're now in the fortunate position of having more resources, more firepower at our disposal. And frankly, that does give us increased optionality.

Okay. Well, that's a good -- optionality is a good note to end on. We'll all go see if we can figure out what's on it, add to the day or not to the day, innit from Shakespeare. But I really enjoy talking to you every year, and I look forward to doing it in person someday, hopefully soon. So thank you for your time.

Thank you, Ben. Thank you all. Stay safe.

Thanks, everybody. Have a great rest of the conference today.