News Corporation (NWSA) Earnings Call Transcript & Summary

Hi, everyone. Thank you for joining us for this session. I'm Kane Hannan, the firm's Australian TMT analyst, and I'm pleased to be joined today by Robert Thomson, the CEO of News Corporation. Robert, thanks so much for joining us for today's session.

Thank you, and thank you all.

It's obviously time at the end, so questions have been submitted. But Robert, maybe just to kick things off, I'll pass it over to you just to talk about the news that's being released today.

Yes, Kane, obviously, we coincided with the Goldman Sachs Conference. We've been working years towards this moment. But we are in a fortuitous position of just having had the best year since the reincarnation of News Corp in 2013, and seeing continuing momentum in the current year. And you'll note that our revenue has surged 30% in the fourth quarter of last fiscal. And for the year, we generated $731 million in free cash flow compared to $180 million in the previous year. So the cash balance is strong. The cash flow is robust. And for those who are conscious of parsing past statements, we had strongly indicated that we would have renewed optionality. And today's important announcements about the about appeal, about the buyback show that we're exercising that optionality to the benefit of all shareholders. The Board has shown its confidence in the company by voting to terminate that stockholder rights plan, which was put in place at the time of the split and, frankly, at a time of profound upheaval for many of our businesses, particularly the News Media companies. And our company, thanks to the efforts of the many, really has managed to navigate those challenges successfully that was certainly not complacent. And those changed circumstances are reflected, obviously, enough in the Board's decision. So it is an exciting time for the company. The heavens are in equilibrium. A few of the longer-term projects are coming to fruition. The renaissance of REALTOR, the bolstering of books, the development of Dow Jones and the fecundity of Foxtel. While the big digital deals have created the news equivalent of retrans phase and these markets are generally certainly more cyber savvy. So returning some of the proceeds of that success to shareholders, to investors, certainly makes sense at this time, particularly as our revenue growth has been increasing at a rapid rate and our teams have proven to be disciplined in their cost control. And the momentum means that we are in an exciting exhilarating epoc at News Corporation.

Perfect. And I suppose, as you said me, it was a massive year for the company with the step change in earnings coming through and some of those entities you spoke to. But if we think about the year ahead in this call, how do you think about the year unfolding? And I suppose how do you think about what the key priorities are for News Corp?

Kane, look, COVID was certainly a stress test. Companies with preexisting conditions, preexisting vulnerabilities have not fared well. Those with strong digital personalities and robust revenue flows have actually prospered. We are genuinely pleased with the way our customers, our companies and our employees have responded to that challenge. I'd particularly like to thank our employees around the world who have not only contributed to the company, but also to their communities, and they've been particularly active and notably generous. Now commercially, as a company, the segment EBITDA rose 26%, and our adjusted EPS rose 200%. But for this year, again, the vicissitudes of the virus aside, the momentum is continuing. The rate of revenue growth is strong. And clearly, we are confident about our cash position. Otherwise, we would not have made the buyback announcement that came today if it was a mere exception last year. There are some exciting challenges with the fuller integration of Houghton Mifflin Harcourt at HarperCollins, the imminent closing of the Opus acquisition at Dow Jones. That was a required sale, shall we say. And the company was acquired at a very reasonable price in these somewhat toppy times. The potential of that company, both in traditional energy and in the emerging carbon market is something that's particularly exciting. One of my first jobs as a journalist was reporting on commodities in Melbourne. And so it's an area of personal interest for me, but one in which we, as a company, have real professional expertise and much of it. The need for reliable carbon metrics and the emerging carbon market itself is obviously an area of particular interest, not to us just as a provider, but to every company. And the Google and Facebook deals, look, they would -- certainly will make a positive difference. I'll have to note that with Google, in particular, there's been a very productive relationship and extending beyond the mere content payments into developing the X-generation audio and video content and really better understanding the ad market, which -- the digital ad market, which it's fair to say, has been too opaque. So we have certainly been pushing publicity there and we're glad that it's more trick transparency, and it's very, very different to the situation of a couple of years ago. And I look many people at News Corp, including our Board, including our leaders of the company around the world to serve credit for pursuing these issues and for challenging what was a pervasive conventional wisdom about payments for news and content. And that conventional wisdom turned out not to be so wise. And as actually [ Voltaire ] it was who observed that it's sometimes dangerous to be right in matters on which the established authorities are wrong. Now a quick pricey of the businesses and -- for the coming months. The audiences and revenue growth at Digital Real Estate certainly has been burgeoning, particularly at REALTOR. As you know, our revenues there rose 36% -- 68% in the fourth quarter. Traffic growth has been consistently 20 percentage points higher than that of Zillow month after month, quarter after quarter. The narrative and the business of Foxtel has been transformed. Our pay streaming audience rose 155% last year, and it's now well over 2 million. And revenues at Foxtel were up 33% in the fourth quarter, which we hope to be a harbinger of the future. At Dow Jones, as you know, EBITDA for the year rose 41%. At HarperCollins, revenues for the year were 19% higher and EBITDA was up 42%. And as I mentioned earlier, that business will certainly be bolstered by the full integration of the Books & Media division of HMH. So in summary, we had a rather successful year, a strong fourth quarter and continuing momentum in this fiscal. And for us, impetus, is imperative.

Perfect. And then you guys obviously made a number of acquisitions over the last 12 months. Please talk about -- and we'll talk about these in a little bit more detail shortly. But I suppose after having cash on the balance sheet for such a long period of time, just interested, of course, what drove the step up in M&A? And then as a second part of that question, I suppose, given the buyback that you have announced, should we be thinking that M&A is off the agenda for the foreseeable future? Or just interested if there's any comments you can make.

Well, to the second part of that question, certainly not. We will be opportunistic as we have been. When the right sort of company comes up at the right sort of price, and those are 2 preconditions. We're in the market, we're a buyer. And we're constantly reviewing our portfolio. As you know, we're along the way, we've made quite a few sales to Dow Jones, Local Media Group, Amplify and really News America Marketing. And that institutional introspection, as you might call it, is ceaseless and it has to be. If you stand still, you lose ground in business. And really, as we made clear quite a while ago, there were 3 particular areas of strategic interest to us. Dow Jones, Books and Digital Real Estate. And so the acquisitions have indeed fallen into those 3 categories, those 3 segments. And so we've acquired IBD and Opus for Dow Jones, reinforced and refined our Asian property business, acquired Mortgage Choice in Australia, which closed in early July and bought HMH Books & Media. So in other words, we've done what we said we would do. And the benefits of those acquisitions will flow through both into the accounts this year certainly and far into the future. And overall, that strong cash position that you referenced has just given us increased optionality, both in terms of potential acquisitions and in capital returns. And we intend to pursue both with vigor and with rigor.

And then I think on this conference last year, I remember you making a point around you being very focused on maximizing the value of REA for investors. Just I was hoping you can update us around this process. Now that you've announced the buyback, should we think that, that's the fun step in that process? Or just interested if there's comments you can make there.

Well, Digital Real Estate is of strategic importance to us. And we have a global perspective on it, which is why we appointed Tracey Fellows as President of Global Digital Real Estate for News Corp. And it's very clear that she and David Doctorow at REALTOR and Owen Wilson at REA are in constant contact, sharing lessons and learnings, insights and instincts. And that is part of an evolving -- a more holistic approach. And looking to focus on realtor.com just for a moment, what does that company worth now? We could have made some structural change 18 months ago. But would you have the sort of valuation that some analysts are giving it at the lower end of $4 billion, others $6 billion and it's been an estimate of $7 billion, which is significantly more, many, many times more than what we paid for the company. And those results are a direct result of us prioritizing the growth of that company and driving value for investors and by driving the business. And look, there's no doubt that we're constantly reviewing the digital property portfolio. We're constantly examining the potential for integration. We're very conscious of creating and realizing value for our shareholders. But that value for shareholders really has grown exponentially because of the focus that we've been able to give to REALTOR and particularly because of the interactions between REALTOR, MarketWatch, The New York Post, The Wall Street Journal and the ability for those platforms to drive high-quality traffic into REALTOR. And that traffic growth at REALTOR has in part been because of the proximity of those relationships. So that of itself is possible in different structures. At the same time, at this moment, in REALTOR's growth in ensuring proximity location, location, location is really important. Overall, segment EBITDA improved $169 million last year. And interestingly, of that, REALTOR contributed around $100 million. And that's not what people would have imagined 2 years ago, I don't think. And it's a tribute to all the teams. And overall, EBITDA was up 49%. These revenues were up 36%. So these are big numbers, and this is clearly a fast-growing business. Despite the vicissitudes of the virus, which in Australia at times have led to a lumpiness in the market as open houses have been made legally impossible. And clearly, in the U.S., too, there have been moments at which in certain states, the market has been affected by the Delta variant. But even despite those challenges, the success is real and the momentum is continuing. And look, when it comes to digital property, we are resolutely digital. We're not a bricks-and-mortars business. This is a -- bricks-and-mortar is a pre-digital strategy really. And we want sellers to have as many potential buyers as possible, and we want realtors to have as many leads as possible. That's our job. And there are clearly qualitatively different leads and the value of that is -- should be and is reflected in the pricing and the positioning with our referral model and the traditional lead generation product, both of which registered at REALTOR, strong growth in the fourth quarter and when referrals accounted for about 30% of the business. So it's a growing business. It's a digital business. We are very happy with the progress, but we are constantly reviewing, not only the structure of digital real estate, but the structure of News Corp and we will not, for a second, be complacent.

Makes sense. We spoke -- we'll share a bit more in a second, but maybe just in terms of other priorities for the business that you've spoken about, the shared service program, I think you identified $100 million worth of savings previously. Just could you give us an update about how that program is tracking and I suppose how we think about the benefits for the year-end?

Yes. Look, the shared service program has been excellent for the company in more ways than one. Of course, around cost discipline, it's important. We should not be buying the same software over and over again from the same vendor at varying prices. We have to take advantage of our scale. That's what shared services is. We have to learn from mistakes when we implement software. When we implement any new technique in the company and making sure that we have a coherent, cogent structure for those lessons to be shared, that's shared services. But shared services is also a creative process where it has brought the company much closer together. We are disparate in many respects, geographically and sometimes in terms of segment. But the coherence and cogence of the conversations taking place within the company now are qualitatively different, to say, 18 months ago when we contemplated the project. So -- and there are savings coming through directly from shared services and indirectly because of the renewed institutional discipline on spending. And so the program itself is an important part, not only in terms of managing expenses and that means managing expenses down, but also in creating a cultural identity for a global company that historically has had a fair amount of federation, a large amount of autonomy. And autonomy in a creative process is important. But autonomy in a spending process, when there are these shared lessons available is not necessarily a great idea.

Perfect. And then I suppose just focusing on Dow Jones from a segment perspective, The Wall Street Journal is obviously at the core of this business, but it is increasingly diversifying. This is an example of that. So I was just interested if you could talk about where do you see that business heading 3 to 5 years? How do we think about the earnings composition over that period?

It's an interesting question. The Wall Street Journal remains a cornerstone of the company, obviously, but MarketWatch is important. IBD will be a particular company to -- that has enormous potential one to watch, I think, for our investors because of the integration, the complementarity of the content. But professional services, in particular, is obviously a priority for us. Given the ongoing success of Risk and Compliance, which expanded another 23% last fiscal. And clearly, the intense focus on ESG, which I know sometimes is defined ambiguously, but I think we basically know what it is, increased regulation, particularly in the U.S. with the current administration. The need for reliable watch lists. They're all suspicious for the Risk and Compliance business. Look, we've -- it's been generally estimated that the total addressable market for that business is around -- by 2026 will be around $24.5 billion. Now who knows precisely what the number is. But what is very clear is that it's a large and growing market and that Dow Jones will play an ever increasing role in that large and growing market. And we are confident that our experience with Risk and Compliance and the focus on clients, the emerging opportunities will assist us with Opus, which you can see with, for example, a large amount of coverage, particularly in Europe about the surge in gas prices and the impact on everything from heating to food prices to logistics. That energy costs still touch every company, every family. And the ubiquity of that professional interest is a strong foundation for a growing Opus business. And beyond that, Opus has already started expanding into carbon products, a fast-growing area, where -- look, there's an absolute need for reliable, verifiable metrics. And is there a company -- a serious company on the planet now that is not thinking about carbon in some shape or form? And the strength of the company in California, in particular, where it's largely based means that it will obviously be at the cutting edge of the carbon market evolution. And just one other point to mention about Opus is that -- look, it's very much a digital company. In fact, it's 100% digital and 95% recurring revenue. So structurally, it's in great shape. And the EBITDA margins are over 50%. And in terms of metrics, those are both reliable and verifiable.

Perfect. I mean it does seem to have some very strong momentum. But maybe just interested if you could talk about how News Corp will create value for shareholders through Opus? I suppose how it's going to work with the Dow Jones segment? And then one question that's just come in just your previous comments around the Opus transaction closing being relatively imminent. Just interested what gives the confidence in that? And if there's any -- I suppose the other part of the question was, do you think there are opportunities to buy other divested assets as part of the S&P market merger that would bolster Dow Jones?

Well, we'll see as that merger evolves. But look, as you can tell and as we promised we would be, we've been opportunistic. That was a required sale. We feel the price was reasonable. There are not many reasonably priced assets in the market these days. And more than the price itself is the opportunity that we see in Opus. Because we have a lot of professional expertise at Dow Jones, commodities is an area that overlaps with a lot of the specialist products within The Wall Street and along within the Dow Jones portfolio. So it's an area where we have expertise. The international network of Dow Jones will be a platform for Opus, and we'll be able to connect with more clients and the other way around as well. Opus has among its clients that there are some that will be able to sell Risk and Compliance products, too. And so the complementarity and the potential from that complementarity, it just isn't binary. And it's also important to be in a market that's clearly expanding where you -- and at that time of expansion, you have a reliable base of revenue, a reliable base of profits, which Opus does. They were already expanding into the carbon market. And when we saw that intuition that they had about how you would naturally extend the products, how you would use some of the same techniques in that emerging market and how we can use our credibility of Dow Jones to give credibility to those carbon products because a lot of carbon products don't have credibility. And so around that, what sort of indices can we create. What sort of other metrics around pricing can we create at a time when there's an absolute craving for those sorts of products.

And then the other transaction in Dow Jones, Investor's Business Daily, they're different sort of segment to Opus. I suppose a similar sort of question. Can you just talk about that transaction in a little bit more detail? And I suppose how we -- how you're creating value through that deal?

Yes. IBD back when it was just a newspaper was -- it was a paper that I read personally. I always admired what they did. It has a distinct personality, and it has a real focus on what its readers are interested in. And its readers as the name suggests are generally interested in investment. And they have a skill set that the broader team at Almar and the team at Dow Jones is very excited about. And look, we already have hundreds of thousands or so digital customers at IBD, and there really are great opportunities to cross-sell and upsell. And the ability that the IBD team has shown in upselling, I think of itself provides some guidance, some inspiration to the team at Dow Jones. And certainly, the integration of the 2 companies is continuing a pace under Almar. And there's no doubt that he sees that potential is excited by it. And what we want to do is cherish the culture at IBD, take advantage of those opportunities, expanded in a very low-cost way globally, continue to create specialist investment products. And look, as you have to do with content at the potential hierarchy of products, premium products at premium prices able to be sold now across a much larger user base.

And then maybe just the core Dow Jones business, you probably alluded to it in some of the previous comments. But at the Investor Day last year, the contrary was around doubling the subscriber base, driving margins higher in the core business and then you're obviously expanding the TAM. But there's 1 year on from the Investor Day. Just interested in how those aspirations have evolved and also how you're thinking about the international strategy at Dow Jones.

Yes. Look, Dow Jones really is in 5 [ figure ]. EBITDA last year was up 41%. The digital advertising market is strong -- continuing to be strong. Subscription growth continues a pace. And so I think you look at the strategy, really having 2 particular areas of strength. One, as you say, in the ability to expand internationally digitally at low cost, digital distribution, quite frankly, is a lot cheaper than print distribution. And the team has developed skills through the years and becoming -- that level of expertise has just been heightened. So one, its reach; and two, its depth. As I said, creating products, differential pricing, it's -- the demographic is an attractive one. And if you create the right products, it's a particularly lucrative business with high margins. And so the pursuit of audience, but also the pursuit of products for that audience.

And then I suppose News Media, some big strategic decisions shifting to online only to some of the regional Australian titles. And then we do have that retrans fee, I mean, in this year. Just interested how you're managing the News Media business. Whether this is still a lot more cost out to come and then sort of rightsizing the cost base? Or do you think we're closer to that digital inflection point to News Media?

We're certainly closer to that digital inflection point. But I have to say that Michael Miller in Australia, and Rebekah Brooks in the U.K. really have done a wonderful job in overseeing the transformation of the businesses. It was clearly a challenge. And in News Media, in Q4 -- last Q4, digital revenue accounted for 32% of total revenue, up from 24%. So as you say, it shows the continuing evolution, rapid evolution of those companies. And at the end of the fiscal, digital subs in Australia were up 25%. And then, for example, you have the extensive reach of the Sun Online, which in June had 124 million unique users. That's a different type of product, but one in which the expertise of the team has expanded along with the reach. And we're very confident that, that digital profile will be increasingly profitable for the Sun and the Sun U.S. expansion has been successful. And in all, our U.S. platforms in total, it's very difficult to totally [indiscernible], but you are talking about 220 million, 230 million monthly uniques for News Corp across Dow Jones, across the New York Post, which as you know, is on the very cusp of profitability and we have hopes for that this year, just wondering Alexander Hamilton and his traditions. But it's -- the company, the News Media division, is really well positioned. Certainly, the revenues from Google and Facebook have helped, but you can't rely on those alone. And it's the ingenuity of our teams. It's their passion, it's their commitment to news and high-quality news. News with -- it's that combination of integrity and ingenuity that is at the very heart of their success and attitude to digital, which is, okay, how can we do digital better and being responsive to reader needs and to client needs. And so I'm very confident about News Media because I'm very confident in the skill set of our team.

And shifting over towards Move. You obviously spoke about some of the fantastic numbers you did last year. Just interested in how you think about the referral model versus the traditional lead model. How those models evolve to Move? Whether we end up going down in more of the referral model over time?

There were leads in leads. And the beauty of referral and lead gen is that you're actually pricing leads at value to the client. And if you're sure of the nature of a lead, if you've identified a genuine potential purchaser rather than someone a probable versus a possible purchaser, understanding that distinction is crucial to understanding value for the REALTOR. And so in our mind, those 2 exist in harmony. But what you also get from that referral model, if it's a probable purchaser, the value not just for real estate, but for mortgages, for insurance, for related services is obviously much greater. So essentially, what you're doing is pricing real estate reality.

Yes, yes. And then you spoke about the $100 million sort of incremental earnings and Move delivered in '21. But then there's obviously been a step-up in marketing and trying to accelerate some of the growth moving forward. Just interested in how you think about that trade-off of profitability versus continuing to grow revenues as you have been doing.

Yes. Look, it's a great question. But marketing is a variable cost, and it beholds us to take advantage of the opportunity. We now have -- we've seen the audience growth. It's obviously much more rapid than that at Zillow. They're not distracted at REALTOR. We are very focused on our core business. We're not in the house flipping. We're not into replastering lounge rooms. We're not into doing the plumbing. But we'll leave that to the plumbers. We are very, very focused on understanding what that digital opportunity is. And so that means, yes, increasing marketing at different times to take advantage of opportunities that are real. But at the same time, being conscious that we've already proven that this is a high-margin business. And so we now have expectations of margin that, frankly, we didn't have 2 years ago. And we're also very conscious of what's variable and what's nonvariable cost. And the beautiful thing about variable cost, it can be varied.

And then Foxtel, obviously at Strategy Day next week, which is a little bit of a surprise. I suppose just what's giving you guys the confidence to host such a day. And then when we think about the emerging streaming businesses, which have got some very good subscriber numbers, how much -- when do you think about the streaming growth managing to offset, I suppose, the cable declines on a sustainable basis?

Yes. Look, it is time for a Strategy Day because the narrative at Foxtel has changed fundamentally. And we have a great story to tell, and this is an opportunity to tell it. And look, it's -- when you think back to just even 2 or 3 years ago and the reputation that Foxtel have, part of it deserved, the revenue growth was slow. We had to put in extra funds. The question I was getting was how much more would you have to put in? I can honestly say, none because the cash generation at Foxtel was strong, the revenue growth, the EBITDA growth over the past year has been particularly strong. And as you say, it's largely because of the streaming strategy. Now it's one thing to have a streaming strategy. It's another to have a successful streaming strategy. And that's what Patrick and Siobhan and the team have been able to do because one of the complaints about Foxtel historically is that while the user interface wasn't good enough, that there were glitches in the check. Well, you would know being in Australia that the Kayo product, which is sports streaming with the Binge product entertainment streaming, those are very successful, very sophisticated, cutting-edge, best-in-class, not only in Australia, but best-in-class in the world products. And that's why there's been such a dramatic increase. Streaming subs were up 154% last year. And the myth about Australia always was that only a very small percentage of people, relatively speaking, would actually take up pay TV in one form or another because of the terrestrial TV configuration in Australia. It's different in the U.S. It's different to the U.K. There was more competition from terrestrial. Well, obviously, what we've seen over the past 18 months is that's simply not true. So you have a much larger audience than people presumed possible. And secondly, we have very, very reasonably priced products at the moment. So not only is the audience growing exponentially for us, we have genuine elasticity in the pricing of those products. And that of itself then changes the potential elasticity for the premium broadcast product because there's already a perceived value among people who are now prepared to pay for content in Australia, weren't prepared to pay in the past. And it's up to us, one, to provide value; and two, in our way to make the most of that value. And that's a story that really hasn't been told, and we are going to tell it in a compelling way on the Strategy Day.

And then just on the content side. Obviously, a lot of M&A happening in the media space, a lot of strategies evolving on a global basis. Just interested if you talk about Foxtel's access to content. Whether you see any risk in renewals, whether it's sport, entertainment in the foreseeable future?

Well, as you know, we have long-term sports rights for the most dominant Australian sports. We've reached agreement, whether it'd be Aussie Rules, NRL, Cricket, Formula One, emerging women's sports in Australia which are becoming particularly popular. We have a great suite of sports products. In entertainment, we have long-term contracts locked up with major providers. Also, we are becoming the very square of video. And having a platform like Foxtel is a real benefit to other providers given the reach we have, given the reputation we have. And so we're not only comfortable about our content, and we're confident about...

And then when you made the comment on results around the optionality you've created at Foxtel, is this just alluding to a potential IPO? Or I suppose what other options should we be thinking about if there's any comments you can make.

Well, we have various options. But look, I don't want to spoil the thrill of the Strategy Day. And so I'd encourage everyone on this call to tune in and get, shall I say, a sense of both the progress and the potential permutations.

Yes, no drums. Then I suppose, just lastly on Book Publishing, it's obviously a phenomenal run through COVID. How do you think about that business trending in a COVID normalized environment? Whether there's potentially some revenue headwinds coming through? And just how we think about the outlook for Books in a 12-, 24-month view?

Yes. Look, it's hard to prognosticate, I mean, token said, the wise only speak of what they know. And so I don't know what's going to happen in 48 months' time. But there really does seem to have been a reading reset with COVID. The -- obviously, there was for a period in certain countries, it was what you might call a captive audience in lockdowns. But we are certainly seeing some of those have acquired habits are enduring in a way that's suggesting there's been something of a reading and listening audio book, a reading renaissance. And look, you will have noted that full year revenues rose 19% and EBITDA was 42% higher. And one thing that's been advantageous for us is the resurgence of interest in the backlist. And HMH brings us a backlist of 7,000 titles. And so we're not only confident about the new books that we have and Brian Murray in the U.S. and Charlie Redmayne and the team internationally. They've done a great job in signing up new orders. But we have this very, very strong foundation of works, which we're able to purpose and with audio to repurpose and earn profit from it. And so as you say, the Book business in the past 2 years has been very successful for us. And I can't see it being anything other than very successful for us in the years ahead.

Perfect. Well, Robert, I think we're basically approaching time, so we might leave it there. I just wanted to thank you again for participating this year and hopefully next year, finally, it might be in person again.

All the very best. Cheers.