News Corporation (NWSA) Earnings Call Transcript & Summary

Good morning, everyone. For those who don't know me, my name is Entcho Raykovski. I cover Australian media at Crédit Suisse. This morning, I wanted to introduce Brian Murray, the President and CEO of HarperCollins, one of News Corp's operating segments. Brian, thank you for joining us today. Before we get started, just a little bit of admin. If there are people online who would like to ask questions, you can e-mail those questions directly to me. You can reach me at [email protected]. I've got plenty of questions for Brian over the course of this morning. But of course, if there are any questions, feel free to send directly to me.

So Brian, as I said, thank you for joining us this morning. I might start with a question on just HarperCollins as a whole. Can you provide us with a brief overview of the HarperCollins assets and comment on how the segment fits into the News Corp portfolio? I thought that would be useful for everyone given that you are just one operating segment of the group, though.

Yes. Thanks, Entcho. Sure. We are -- in News Corp's financials, HarperCollins is 100% of the Book Publishing segment. So that is HarperCollins in its entirety. We are the second largest -- HarperCollins is the second largest consumer or book publisher, and we have operations in 17 countries, and we publish in 16 different languages. And we have about 120 imprints of our creative teams that sign up authors all around the world in all these different countries and different languages. So that's how HarperCollins fits within the total News Corp portfolio.

Got it. And then this is a question which I get from investors frequently. But what benefits do you see for HarperCollins of Book Publishing being part of the broader News Corp Group? Do you see significant synergies as being part of that group? Or do you believe that Book Publishing operation can operate on its own?

Yes. We have -- look, there are a number of instances where HarperCollins benefits from being part of a larger global media company, and that's been true for my entire career when we were the larger News Corp and even -- and the current News Corp. We overlap geographically. 90-plus percent of our revenues occur in the geographic markets where News Corp's newspapers are very big in the U.S., in the U.K. and Australia. And that presents many opportunities for us to cross-market to reach audiences in those markets to get our authors and our books promoted. There are a number of ways and programs that we work with our sister companies within News Corp in order to give our authors a little bit of a leg up. We also get benefits just in terms of access to capital. So we successfully closed the acquisition of Houghton Mifflin's Books and Media segment. We made a run for Simon & Schuster. We're one of the key 3 pillars within News Corp's growth strategy. And as a result, we get a tremendous amount of support to invest in our business, both organically and through acquisitions and through investment into systems and things like that, that help us to be more efficient and more profitable. So yes, there's a number of ways that we're able to work together and that we benefit from being part of a larger company. Particularly when we compete against and are dependent on these global tech platforms, scale matters. And so having a global scale at HarperCollins and combining that with our parent company that also has global scale definitely leads to benefits to the HarperCollins business and our authors.

You've made some interesting points, and I'd like to touch on those later in the call, particularly around some of the transaction activity in the book space. But perhaps before we get to that, Book Publishing has widely been perceived as being somewhat of a COVID beneficiary given consumers have had, I guess, increased amount of time to spend, which would have otherwise been spent either undertaking recreational activities or consuming perhaps other goods. Can you provide us with your perspective on where the books has benefited from COVID over the last 12 months? And how do you see the outlook for the Book Publishing segment over the next sort of 12 to 18 months?

Yes. It's -- we've definitely benefited. We have COVID tailwinds. And it wasn't always clear in the beginning, if that was going to be the case. I felt that my experience in Book Publishing is when something big happens in the world, sometimes consumers pull back. But usually, they pull back for a short amount of time, and then they come rushing back to book-buying and book-reading. And that was certainly the case in COVID. In the early days, there were all kinds of problems in the supply chain. Amazon deemphasized books in order to get essential products into the hands of consumers. We saw consumer spending on book shrink a little bit for the first 2 months. But I would say from 4 months into the pandemic until now, so for really almost the last 12 months, we've had huge tailwinds in Book Publishing. Spending on books is up double digits, maybe 15% And that's true around the world. It's been double-digit increases in book spending in all the languages and all the countries where we operate. We've seen people turn to books as a form of entertainment, as an escape. There has been people who've gotten time back that they used to spend maybe commuting or traveling. There's definitely this renaissance in book reading and book interest. And I think there are a lot of factors that lead into that. We all spend so much time on screens now for our -- either our personal social media and for our work now we spend time on screens. And so escaping into a book, whether it's print or digital, people are really taking to that storytelling format. And I think that's going to continue. So we've definitely benefited and I have not seen any signs of that slowing down just yet.

And given that -- I mean, you acknowledge there has been that benefit. Does it become a concern heading into FY '22 when you start cycling some of those tougher comps? Or is there anything you can do to mitigate that impact?

Yes. Well, we are constantly looking for signs of a pullback, and we see no signs of a pullback on the consumer spending front. We've done consumer research to try to figure out whether or not consumers were going to pull back. And all the consumer research we've been commissioning and doing suggest that consumers are going to continue to spend the time and money on buying books going in through the remainder of 2021. And when you think about how all the markets and countries around the world are responding to COVID, it's not like there's going to be a switch that we'd flip and we all go back to the way things were. Everything is happening very, very gradually. And how we work and how we live is changing, and it all remains to be seen. If people are -- if a lot of jobs are going to be hybrid jobs, there's just going to be this gradual adjustment to whatever the new normal ends up being. And so I feel pretty confident that consumer spending, based on the research we're seeing and the fact that we haven't seen any pullback yet, that we may have just reached a new level in consumer spending, and we may be okay. I'm not seeing any signs of a pullback from the consumer that gives me pause at this point. So now in terms of what are we doing, we are being aggressive though in terms of buying books. I think we've seen the book high grow maybe 15%. And so our response, which is part opportunistic and part defensive, is to be aggressive in buying right now because if that pie remains large, we want to make sure that we get a nice share of the larger pie. And if it happens to wane a little bit, we want to make sure that we have a lot of new exciting books in the future that will maintain our revenues at the current levels. So we've been very aggressive over the last 6 to 9 months in trying to sign up the best books that we see in the marketplace.

Got it. I think also an interesting dynamic which has come out within the book segment is what proportion is digital e-books going to be as a percentage of total revenues. And what I think is interesting for HarperCollins is that's really bounced around if you look at it from quarter-to-quarter. Can you perhaps talk a little bit about that dynamic? What do you think has driven some of that variability? If I look at it, you've gone from sort of the high teens to the high 20s in some quarters. Have you spotted any sort of patterns you can talk to? And do you see that spend shifting as a result of COVID or that proportion of digital shifting?

Yes. COVID definitely scrambled the formats that consumers read is the best way to think of it. In the early days when Amazon deemphasized books, people couldn't get books. Their local independent book stores were closed. And Amazon was that -- it was hard to get them from Amazon, but it was easy to download an e-book. And so we saw how consumers adjust their formats depending on how quickly they want the book, how badly they want the book. So we saw this massive increase in e-books in the early days of the pandemic. And then once Amazon kind of stabilized a little bit and some of the independent bookstores stabilized, we started to see people kind of going back to print books a little bit. And then digital audio, which has been our fastest-growing format for the last 5 to 8 years, took a real pause because a lot of digital audio is dependent on commuters. And so there was a real pause in the growth rate of digital audio in the early part of the pandemic. And now that we've been in the pandemic for a while, we've now seen a return to growth of digital audio. So it was a bit like a shock to the system. But my takeaway is that the consumers find the format that works for them, how quickly do they want the book, what format do they want the book. But at the end of the day, they still want the storytelling. And because we produce these books in all formats, hard cover paperback, audio and e-book, the consumer can choose which format to get. And so it was great to see -- in some ways, it kind of proved out the resilience of the book publishing business that we had this big shock to the supply chain. We had a shock to everything that we were dealing with and keeping our business going, and yet consumers still managed to find the books. The books were really important to them to get through the pandemic. And so it's been a life -- a bit of a lesson for us about just how resilient this industry really is.

And the follow-up question, I'm not sure if this is going to be an easy one to answer. But do you have a view on where digital revenues settle for the book segment over time? There seems to be some shift towards digital, albeit lumpy. Any sort of broad guidance would be useful.

Yes, I didn't answer that. But I think we're going to continue to see growth. The trend before COVID was that we had a little bit of a slow decline on e-books, but very fast growth on digital audio. And so combined, there was growth in digital. And I think we're going to return to that. So I do think our mix overall, if we're 75%, 25%, let's say, right now, I do think that 25% is going to continue to grow. And -- but I don't know where it settles out. It's -- we've watched the consumer adjust before, but I think it's going to continue to grow, but I don't know where it stops.

And how should we think about the margins between the -- or the margin you can generate on digital books -- on e-books as opposed to the paper books?

So the margins should continue to expand in the business because of some good long-term trends. So one is the digital trend. As the business shifts to digital, the business becomes more efficient and margins do go up. But even on the print side, we've seen a big increase in selling through online channels. I mean Amazon had tremendous growth, but so did other bookstores. Even the independents have been selling online. We've seen Target and Walmart have a big increase online. And so even on the print business, as that business moves online, the online sales channel is more efficient. And so that also -- that efficiency also lends itself to expanding margins. So those trends, selling books online, increasing digital penetration, I think that it should continue to lead to improved margins in the industry. So I still think you see our business as it becomes more efficient, we have much better decision-making around forecasting how many books we need to print. That used to be a big inefficiency in the business when we were 100% print and we had to distribute books physically everywhere across the country. There's tremendous inefficiencies there. And our industry just gets consistently more and more efficient, and we see the working capital required to run our business continues to go down. And so I think those trends continue, and I'm excited about how that allows us to reinvest in our business and to grow it into new markets, into new genres and into new -- into the kind of emerging technology areas about marketing our books and things like that. So I think the cycle is very good for us.

And perhaps just a follow-up, your comment around the online channel. So just to be clear, that's not just a benefit for the retailer in terms of minimizing their costs. You get some of those benefits as well?

We do. Yes. It's -- we definitely get benefits from the shift to online. Yes.

I mean are you able...

So I'm going to guess if you -- Entcho, you stopped out there for a second. But some of the benefits when we go online, in a brick-and-mortar world, we have to distribute to thousands of different bookstores and not every book will sell out of a bookstore. So we'll get very high returns, for example. When we sell through the online channel, it's just much more efficient. If we ship 10 or 20 copies of a book to an online retailer, even if it's Walmart or Barnes & Noble or an independent organization that sells online, those books will eventually all sell out and they'll order more. It's not like they're distributed onto retail shelf space across thousands of bookstores in the country. So that's just an example of how selling online is more efficient for the publisher. We don't have that kind of wastage of returns coming back to us. And so that's a benefit as well.

Okay. Okay. And sorry, I may have cut out for a second. But I think we're back on track. I'm sure a question that you get asked quite a bit, the release slate, that seems to be -- traditionally has been a big driver of revenues from quarter-to-quarter. Can you comment on the release slate for the coming quarters? And perhaps is there a way of making the business less reliant on those new releases? I mean we recall last decade, the divergence seemed to -- well, it was a big boost to revenues over a number of quarters, but then you kind of came up against those much tougher comps. So what can you do in the business to be perhaps less lumpy?

Well, let's see. It's -- I think of our business in 2 parts, really. There's sort of, we work really hard to buy and publish books that are going to backlist that will sell for decades. And that's very important to us to make sure that we're just not buying -- we're not only buying books that are really big today and then are gone after a year. So we've tried to focus on that so that our backlist catalog is alive and well and growing because that is, after all, a huge annuity for the publisher, for our shareholders and for our authors. I mean that's how our authors' income continues to be maintained, and we have the responsibility to continue to grow and nurture that backlist catalog. But when it comes to the new releases, we do have to take our shots. And you never know for sure what's going to become a hit, what's going to sell for decades. And so on our frontlist is there is a little bit of a R&D related to our frontlist, where we're speculating. And I mentioned where we've been very aggressive over the last 9 months. We're increasing title output at the moment because we believe the pie has gotten larger and we think it's going to remain larger. So we've been investing in our programs organically. But I think there's always going to be an element of hits to our business. But it's very different than, say, for example, the film business where it was all hits, all these tent poles. We have those, and I think of those as really great when we have them. We currently have Bridgerton. We have 20 years of publishing of a romance series that became the Netflix series, Bridgerton. And I think we've done over $30 million in revenues in the last, I don't know, 9 months or so on Bridgerton. But that's our catalog as well as some new books. But that's the business that we're in. So those were books that we're selling well. And then Netflix came along and created a very successful streaming product, and we benefited from that. Divergent, as you mentioned, from a decade ago, very similar. It was a 4-book series. And a film came out and when the last book came out, and it became a massive -- I think that was $100 million. So we're not dependent on those hits that what makes our business lumpy. But I always welcome them when they come because there -- they do a tremendous amount for our business and for booksellers too when we get those sorts of hits because a big hit like that, all boat rides. Our retailers are very happy. It brings in-store traffic, which sells other books. And of course, it flows to HarperCollins and to our authors and allows us to continue to invest in our business. So we're always going to have that hit-driven. But really, the core fundamentals of the business really come from our catalog and our ability to grow that catalog over time. And then we're seeing whether it's podcast streaming or whether we're seeing the streamers with Netflix invest in books and develop them into the next greatest films or television series. So I think we're in a great spot, and it just goes to show you that the books are often the original IP that are mined by these other companies, and then we get a really nice benefit as a result.

And I'm not sure you're able to provide this, but generally, in sort of a normal quarter, what percentage of revenues would come from the backlist as opposed to new releases or what you classify as hits?

Yes. We're probably, I'd say 60-40 is what our -- 60% of our revenues tend to be backlist and about 40% would be our new release slate And then when you have a hit and the hit can either come from your frontlist or it can come from your backlist. So Bridgerton was more of a backlist hit. There's going to be another -- Amazon is making a Lord of the Rings new content based on -- we have now after the acquisition of Houghton Mifflin, we have world English rights for Lord of the Rings. So we're going to have a nice benefit from that. That's our backlist. But then there's other hits that we have in our frontlist. And a few years ago, it was the Chip and Joanna Gaines. We had the Magnolia Table, I think, 2 years ago. It was a massive hit. Sold a few million copies of a cookbook. And so that was a frontlist hit. So they can come from anywhere. As long as we're investing in really high-quality commercial content, we can see those benefits coming from either frontlist or backlist.

You mentioned Houghton Mifflin, so perhaps a nice segue to talk about the transaction. Could you just talk about the rationale behind the acquisition? You mentioned Lord of the Rings. So I'm sure that was a key driver. And then if you could talk about that. And then secondly, I guess, if I look at the headline multiple, looks reasonably full, but then when you take into account the synergies, which you've been very clear about pointing out, that $20 million of cost synergies that drops substantially, and if you can touch on your comfort level around achieving those synergies?

Sure. Yes, Houghton Mifflin is a great publishing asset, fantastic catalog. And their new publishing, particularly in the children's category and in the lifestyle category, was also very good. And those are content areas where HarperCollins is interested in growing. So they were publishing books that we thought would accelerate some of our organic growth plans. And then, of course, you have this massive backlist catalog that comes over, which is also very complementary to HarperCollins. And the Lord of the Rings, in particular, having -- kind of combining -- we had British Commonwealth rights. So our U.K., Australia, India, and we have licensed a lot of the foreign rights to foreign language markets. But now we also have the English language rights for North America. And that's -- so bringing that all together was a very important strategic component of the deal, particularly leading up to the massive investment that Amazon is making in telling new stories based on the J.R.R. Tolkien's world. So we have that -- those television films. They're trying to do sort of a Game of Thrones type storytelling on Amazon. And we don't know when that's coming out. It's going to come out in maybe 1, 2 or 3 years from now. But we'll have all those books together, and we should have a nice lift as a result of getting this deal done now, and so we're very excited about it. The synergies, I mean, this is something that my team and I -- we've done at least 5 of these acquisitions. We're highly confident in achieving the $20 million in synergies we talked about. They're all cost-related synergies. When you bring 2 publishing companies together, and we've done this with Thomas Nelson. We've done it with Harlequin. When you bring publishing companies together, there's a lot of efficiencies that come from your back office. And so we're actively now that we're into the first quarter of working with Houghton Mifflin team figuring out how to bring the Houghton Mifflin operations onto the HarperCollins back-office infrastructure. And it's fairly straightforward. They're a North American business. So we bring them in, and so we're very confident we're going to get there. It will take a little bit of time for us to bring all the systems together and the data over. But we're right on track, and I expect us to get there. And we'll definitely get the $20 million that we've targeted ourselves to achieve.

And you noted that's cost synergies. You haven't included any revenue synergies within that estimate. Broadly, how should we think about the quantum of the potential revenue synergies?

Yes. The -- when we value publishing acquisitions, we tend to do it all on costs, and then we know that there are revenue synergies. And so we're still in the process of assessing those. We expect them to come probably from the international markets. So Houghton Mifflin was distributing through third parties to the U.K., to Australia, to Canada, to India. We have big operations in all of those countries. And so when we bring those books into our own teams, generally, we see an increase in revenues once HarperCollins begins to distribute them because they are considered HarperCollins books, and they get a little bit more focus, a little more attention than we tend to get an increase in sales. So that's one example. And then I think there are other examples within the U.S., where I think, in some cases, we found Houghton Mifflin was doing some things very interestingly because they were part of -- their parent company was an education publisher. They were selling more into educational distributors. It might help some of our children's books in HarperCollins and then vice versa. I think some of the trade sales, when Houghton Mifflin comes into our selling apparatus, we may be able to do a little bit more than they were doing on their own because they were a smaller trade publishing company. So -- but we haven't quantified those yet, but we know they're there, and we're working to go after them.

That's useful color. And while we're talking about transactions, you've mentioned Simon & Schuster early in the discussion. Obviously, News Corp was reported to have been a bit of for -- that business transaction didn't happen. Was it the acquisition price that ultimately turned your way?

Well, look, we are -- as I mentioned at the top, News Corp is very supportive of the book segment and investing in the book segment. But we tend to be very disciplined. I think that's been one of the hallmarks is that we really do our homework, and they just didn't work for us. It's a great asset. And there were other -- someone else has gone -- paid a lot of money and it remains to be seen if the deal gets -- kind of gets closed or not. But we're always and we're going to continue to be on the lookout for other acquisitions. There are still many medium-sized and small-sized book publishers that are out there that might specialize in a certain niche or content area that would be attractive to us. And if we find them and there's a good fit and an agreement around valuation, we would pursue them. So -- but we're just -- we're bystander as it comes to S&S. So we're kind of going to watch what Bertelsmann does and CBSViacom as they try to work it through and get approval.

But do you think -- sorry, maybe this is not a particularly fair question to ask, but what is your view? Will they need to divest part of the portfolio in order to get the transaction to go through?

Yes. I really don't know. I mean, I think antitrust lawyers don't necessarily agree on that question. So yes, we -- I have no idea and we just have to wait and see. I mean their market shares in certain content areas would be very high, but it all depends with the government how they define the market. And that's the crux of the issue. And so we're just going to be bystanders and watch and see what happens.

And you mentioned that you would be interested in further acquisitions. If you were to do that, would you look for geographic expansion? Or is it just particular content areas that you look to get into?

It would be both. It could be geographic expansion. A year ago, we bought the Egmont businesses. That was -- we bought 3 businesses. We bought their U.K. business. They had a small business in Germany and in Poland. So that was an example of both the content area we were interested in, in terms of children's publishing and then also the geography. So it could be either or, or an and for us but we just have to look at them all one at a time when they come up. And at the moment, we're really focused on Houghton Mifflin. So we're not like active at the moment. We've got our hands full, but we will continue to look and try to find future opportunities as we go forward.

I mean, I think it's pretty clear from this discussion that consolidation is a clear -- very clear theme in the industry. I know we're nearly out of time, but perhaps the last question from me. How important is scale in Book Publishing? And I mean, do you expect that the top 2 publishers will continue to get bigger, and that's it's just the way it's going to play out over time?

Yes. Scale is very important. I mean it's just a fact that we trade with and trade through and market through all these big tech platforms and size matters. And so when you're bigger, you can ride out. Just in publishing alone, you can kind of invest in books. You can take big risks when you're larger. When you're smaller, it's very hard to take big risks on authors and content. And so it just -- the economics in the whole industry and the value chain kind of point to size being very helpful to being a successful company. And so I do think there's going to be continued consolidation. If you look at other similar industries, obviously, music went very far, where very -- Book Publishing is very similar to music in some regards and then we invest in artists. And so yes, I think there's going to continue to be moves to consolidation within the industry. And yes, yes so -- and we hope to be active in that regard.

Got it. That's very clear. With the 35 minutes we have, a lot of it is up. So we will have to wrap it up. Brian, thank you very much for joining us today. Very insightful and very good to learn more about the Book Publishing segment. And everyone else who's on the line, thank you as well.

Thank you, Entcho. All right. Take care.

Thanks.