News Corporation (NWSA) Earnings Call Transcript & Summary

Good morning, everyone. Thanks for joining us on day 4 of the Morgan Stanley TMT Conference. My name is Sean Diffley, I'm one of the TMT sector specialists here at Morgan Stanley. I'm very excited to be joined by the CEO of News Corp, Robert Thomson.

So Robert, great to see you. Obviously, it's a bit of a chaotic time in the world. I think the power of institutional journalism really comes through during times like this. So I want to turn to you first and ask you just how you're thinking about what's going on in Russia and Ukraine. Do you guys have any exposure? How do you think about the impact on the business?

Commercially, de minimis. Obviously, we have a regular human exposure in that we have 29 journalists in theater at the moment. And it's, frankly, as you said, in terms of professional journalism, this is a real challenge. You cannot just send somebody to Ukraine to cover this. And so each of those journalists has been properly trained in conflict zones. Each of them is very experienced. We have security teams with them. And you're seeing a massive level of interest in the coverage. People are looking for factual, what's going on. It's a very confusing fear of war. And with that comes the need to try and have some kind of understanding of the ebb and flow of frankly the violence and the brutality and the tragedy. And so you're seeing, for example, at the Wall Street Journal, which has extensive coverage each day. I presume most people in this room would read the Wall Street Journal, that nonsubscriber traffic is up 51%. The number of subs is running around 39% over outlook. And that just tells you that's new subs. It just tells you that there's a huge appetite for understanding during a period of real tragedy, in particular for the people in Ukraine.

All right. I want to step back. And over the last 12 to 18 months, the company has operated really well during an incredibly difficult environment. So I was hoping you could discuss your strategic priorities and key areas of focus over the next kind of 1 to 3 years?

We were -- the pandemic really was a stress test of culture, of strategy, of character. And we're fortunate to have a very strong culture led by Rupert and Lachlan through the decades. And that, I think, not only helped us endure during a period of real challenge. But as you know, Q2 was a record quarter for News Corp into Q3, the trends are very positive. It varies a little company by company, obviously. And clearly, we're watching price differentials very closely and imposing extra discipline on the companies. But the momentum is still certainly there. And you have to ask, well, why is that? And the answer really is that since the spin, when we inherited what you might call a mixed bag of assets and I think we used to joke, I won't do it alliteratively about the name of the company. And we've done an awful lot of work and the leaders of the businesses have done a tremendous amount of work. So for example, we sold Amplify, the digital education business, which was definitely a worthy enterprise, but it was burning through $60 million to $70 million a year. We sold off the local media group at Dow Jones. At the moment Warren Buffett was buying local papers around 2013 because frankly, my instinct was local media, in particular, was vulnerable local and regional. It's probably one of the few times we've bested Warrant Buffett. And there's no doubt that when you look at something like News America Marketing, which historically people thought was an integral part of News Corp. That it's changed fundamentally with the demise, particularly of regional print. And so the Discount Coupon business was evaporating. We sold that. And at the same time, we started to buy assets that we're making the character of the company, hopefully, more obvious to investors and also providing more transparency, which is what we were asked for, for example, with Dow Jones, the resegmenting, and so you can see up close precisely how these assets are performing. And by making that more visible, more transparent. It also put more pressure on the News Media section. And it's interesting that that division in the first half, its profits were up 200%. And I think it was partly the extra scrutiny. In the past, News Media was bundled together with News America Marketing and a -- so it's a little hard to see. And so the sunlight and the scrutiny has been good for the company. But -- and then clearly, the acquisition of REALTOR has in its own way, being transformative. And where we have acquired it for net-net, when you look at the tax benefits, when you look at the cash on hand, when you look at the cash settlement, we've got from Zillow because of the bad behavior and cost just over $600 million. It's generally valued by most external independent assessors of somewhere between $5 billion and $7 billion some -- a couple higher, a couple low. And I remember when we acquired it, there was a great -- large degree of skepticism. It had been #1. It was #3. How on earth are you going to compete against Zillow and Trulia, they were 2 at that time. And up to December, for 23 successive months, our traffic growth has been higher than that of Zillow. So it's obviously a company -- it's not just a renaissance, it's a real rebirth, a reincarnation at REALTOR. And so whether it be the digital transition of our newspapers, which was difficult, whether it be the rebirth of REALTOR, whether it be looking at what is the right composition of assets. the renaissance of Foxtel, which 2 years ago, we were being asked, how much more we are you going to have to put in. Now essentially, we're being asked how much you're going to take out. And all of these efforts over many, many years have led us to this point. And -- but the last thing we can afford to be now is complacent. And the musician and philosopher, Nick Cave, famously said that complacency is a disease of the autumn. News Corp is in the early spring.

I love that. I like the Nick Cave reference first to the conference. So thank you. So you've clearly simplified the company, and I think all of the strategic focus makes a lot of sense, and that's not lost on investors. I want to ask about your 2 recent acquisitions, the OPIS and Base Chemicals, and then you also completed a bond offering.

Yes.

Maybe you can elaborate on the rationale of those 2 deals. I think as you pointed out, you've obviously been pruning the portfolio and getting rid of a lot of assets. Maybe just walk through the strategic rationale of the 2 recent.

One of my first jobs -- the first task in my first job as a 7-year-old coffee boy in Melbourne was to record commodity prices. And the first thing I was told, don't get it wrong or you're fired. And secondly, it was fascinating even then how news dependent they were. And there's a very -- there are 2 areas that most journalists understand -- not necessarily easy to understand, but they're easier than most financial instruments to understand, and that's commodities and FX. And the truth is about 3 years ago, I said to our team, find a commodities company because I thought that was one area that fitted very neatly with what is really our funnel strategy. You have MarketWatch, you have the Wall Street Journal, you have Barron's, now you have IBD, we have risk and compliance of professional. And that you bring in an audience and keep selling them premium products at premium prices. And particularly where we can link our financial commodity to news, where we can provide daily updates that infrastructure is there, then the insight, the analysis and you've seen obviously the amount of interest in energy -- energy pricing, energy policy, and that's ongoing with OPIS. And we were incredibly fortunate that for regulatory reasons, that was a forced disposal. They needed a credible acquirer and for both OPIS and Base Chemicals. And it's fair to say we've got them at very attractive prices because of those circumstances. And so it just so happened to fit our strategy. And it does reveal, as I said, there's the broader strategy for Dow Jones, which is multi-tiered, cohesively linking different content sets. And what we'd like to think is a seamlessly segmented way. And around it, you have Factiva, obviously, which has a huge amount of energy-related content and then providing services for knowing -- need to know audience who when you provide them with relevant intel, it's definitely prepared to pay. And the fact that we have this growing user base at this end of the funnel sort of like an inverted funnel with cost here, price there. And that it's constantly growing. And as I mentioned to you, particularly in the last couple of weeks means that we have a ready flow of potential premium customers. And the bond issue, look, it was -- we weren't geniuses, but we had a sense that the interest rates were on the rise. We were able to do it at very attractive rates. It's helped us make those acquisitions. And I think it just shows you that we're a more assertive company, where we feel confident that those challenges that I mentioned earlier have generally been overcome. And we weren't in a position before sorting out media and sorting out the relationship with big digital, sorting out digital advertising. We really weren't in a position to be sure that we have the cash generation necessary to be able to expand the company in the way we want to and we're at that moment now.

That makes a lot of sense. And you're right. I mean I'm checking my Wall Street Journal app to check the oil price every 20 minutes or so.

We have some higher value-added products at higher prices for you to...

Perfect. Yes. So I guess how should we be thinking about other areas of M&A, strategic focus going forward?

We can see that we've done a couple of little things at REALTOR, a mortgage choice in Australia, for REA because that's a natural adjacency. People talk about adjacencies, and they used the word, I think, very loosely because some -- to me, when you -- somebody is trying to justify an acquisition of an adjacency, it seems like a far flown distant land, where is that being a big mortgage broker in Australia when you have those home listings just makes complete sense. And then HarperCollins, obviously, HMH, which has been very well put together by Brian Murray and the team. They have a history of integrating intelligently, generating value for investors and generating value for the company generally. And I think we were very clear in recent years that Dow Jones digital real estate and books would be where we scrutinized for opportunities, and that's precisely where we've made acquisitions.

Got it. Okay. So we'll dig into Dow Jones a little bit. So regarding the big tech partnerships, maybe you can discuss how investors should be thinking about the contribution and sizing around both Google and Facebook deals and then you recently renewed Apple deal.

Yes. We're subject to some pretty stringent nondisclosure requirements. But the -- we mentioned publicly that it's comfortably into 9 figures, including Facebook annually, which it is comfortably into 9 figures. The Apple deal is on top of that, and that's a definite improvement on the previous Apple deal. And Apple deserves a lot of credit, Tim and Eddy, for really being the first to do a content deal for news. And so we were the cornerstone partner of the Apple News+ offering. And we're working -- and with them and with Google and with Facebook, looking at different ways of distributing news, looking at different audio, different video products, making the most of the content that we have, but sometimes they see in our content, things that we don't appreciate. And sometimes we help them understand how you can provide a better content experience. And so -- it's not just the money, the money is nice, and the advertising money is on top of that, which is also a rather pleasant experience. But it really is being at the cutting edge of content creation and distribution. And so the intense relationships and discussions we've been -- we can't say about what, but we've been talking to Apple frequently in the last few weeks about something here, something there. So yes, it's about the transaction. But more than that, it's about the platform for the future and the creation and distribution of content.

That makes a lot of sense. And I was hoping you could discuss the sub-growth trajectory at Dow Jones and Wall Street Journal a little bit further. Obviously, how do we think about COVID pull-forward and the new cycle more broadly. You had mentioned at the onset that you've seen a big uptick in non-subscribers checking news. And then we're obviously marching towards a midterm election cycle. So how should we think about sub cadence?

Yes. Well, people talk about Trump bump. I think what we've seen at the Wall Street Journal is a trust bump that people are looking for news that they trust. And so we haven't had the post-Trump slump that has afflicted certain other media properties. And I think you saw in the second quarter that overall subs at Dow Jones are up 17%, digital only were up 23%. We're also seeing significant advertising growth. It's been up around 20% year-on-year. That trend remains in place. And so there's both in terms of advertisers wanting a trusted forum for their brand, their product and readers seeking out trusted news and analysis. Dow Jones generally -- so the Barron's, MarketWatch, the Wall Street Journal, IBD, plus the Risk and Compliance is doing phenomenally well, as you know. People are craving accuracy because I think they can also perceive that a lot of coverage news -- look, opinion pages are opinion pages and they're absolutely entitled to have strong opinion. They have the objective of being subjective, and so they should. But readers want to -- journalism has the objective of being objective. And they can tell on other platforms. I won't name the guilty parties. They can tell that a lot of the news is fed through a political paradigm. There's a political prism through which narratives are created. And I've always thought that a theme should come from the facts. A theme should not be generated by selectively choosing facts to support the theme, which is the content cart before the horse. And so readers are smart. As I can tell the difference, I can see when this newspaper or that newspaper is biased. They can -- they understand why they're being biased, they don't like it. And so the affinity and the loyalty to truth is an advantage that the Wall Street Journal has.

Right. And obviously, it's a subscription business, but you did mention advertising, question that came up a lot this week is just are you seeing any softness related to the geopolitical tensions? Do we have to worry about that at all?

Not as yet. I mean we have -- if you look at where we're most excited, most exposed, therefore, it's India. I mean, obviously, I have a background in China having been in correspondent there and back and forth a lot. There always seemed to me to be a risky market for us. Some months -- in recent months, we've been the #1 digital property side in India. That was our investment where we're nowhere exposed in that -- to that extent in Russia. It's -- again, I spend a little bit of time there. It always seem to -- me to be not just risky but hyper risky. And so India is a developing country and developing opportunity of choice.

Got it. Okay. And then I want to talk about the margin improvement, which you alluded to earlier, Dow Jones over the last few quarters. Maybe you could talk about the drivers of that and then how you kind of balance that with investments in the business and keeping the newsroom fresh?

Yes. It's a great question because it can -- there is a balance, and you don't want it to be a contradiction. And I think you should -- you will have noticed that the margin improved by 400 basis points. And that was partly the increase in premium sales. It was the strength of subscription pricing. And the margin now is at a record since acquisition and beyond, frankly. And they -- but look, you have to invest in general, the cost, for example, of maintaining an important and necessary staff in Eastern Europe at the moment is -- I mean it's factored into budgets. But it shows you that -- and you can't do that on the cheap, right? But back to the -- readers can tell the difference. Readers are smart. They are qualitative in their assessment of news. They are qualitative in their judgments about it is biased or not? They are qualitative about does this woman or man know what they're talking about. And so there's a necessary investment, but that investment is recognized at the reader end and ultimately, the revenue end.

Got it. And I wanted to shift over to digital real estate. So both Move and REA benefited from the hot housing market over the last couple of years? How do you assess the landscape in 2022?

Yes. I think you're right to ask it from a macro perspective. The -- if you cast your mind back a couple of years, there was a lot of debate about whether millennials would own houses, that there would be sort of a housing equivalent of WeWork, sort of like WeHome. And that's -- of course, that myth has been exploded. And so you're seeing -- during the pandemic, it was about 1.6 million millennial households were formed. They're relatively wealthy in addition to the existing millennial base. They're wealthy. They're looking for a home, they're looking for more space but you can't work from home without a home. So that macro trend is positive. Then around interest rates, they've been extremely -- by any standards, they're still low. And if people talk about the Fed at 3.5 next year, who knows, but these are still relatively low interest rates. And for us, because we do have partnerships with mortgage companies because we get leads, which are valuable. And interestingly, higher interest rates up to a point, and there is a tipping point, but at this level, suit us because mortgage companies have been focused on refi. And the refi market is down 46%, most recent figures. And so mortgages as opposed to -- are now going to be larger. So what we found was that that mortgage companies were not that much interested in leads because they're rushing to do refis. Now the value of our leads for mortgage companies, given that the focus is now on the prime mortgage market, is much greater. So that's a macro -- now as I say, that's up to -- where is that threshold, where interest rates just get to, we're nowhere near that point at the moment. And I would track, I think it's worth tracking mortgage versus refi numbers because it will tell you precisely how valuable REALTOR and its customer base is.

Got it. And maybe you want to hit on REA, which obviously you guys own a good chunk of and maybe U.S. investors don't spend as much time on.

Yes. Well, REA is doing very well. It's slightly flatted by the extreme lockdown in Australia. So you're seeing a large increase in listings in Sydney, in particular, around 9%, Melbourne around 5% year-on-year. So you -- a lot of activity are concerned about prices but underlying strength, interest rates, again, relatively low. The Reserve Bank has indicated that they'll go higher. But again, by any historic standards, it's relatively low. So the issue in Australia will be the -- external factors will play a role, but Australia being a commodity economy, it does disproportionately well at a time when other sources of commodities have become more complicated, shall we say. The -- it's a big generator of gas or LNG. And so the macro for Australia is positive. And the -- depending on prices -- home prices in Australia, the outlook generally is for a lot more listings, lot more activity and the more listings, the better for us.

Great. And turning back to the U.S., just on the competitive landscape and digital real estate. So Zillow exited iBuying. Is there any impact on realtor.com and how we think about kind of the broader competitive landscape?

That was -- I remember -- not at the Morgan Stanley conference because it's full of intelligent people. But I remember being asked, geez, and I remember I was constantly asked, why aren't you going into iBuying? And it just looked crazy for me because it's not a digital property business, like fixing forces, grinding the grounding. I mean, really? I mean mending mirrors and crazy paving. Do you just thought you had to -- it's a very -- bricks-and-mortar is a bricks-and-mortar thing. It's not a digital thing. So it surprised me that people were pushing us in that [ direction ]. We were resolutely focused on our core competence, which is developing audience growth, quality of user experience, building out our real estate editorial on REALTOR. So it's a more holistic experience so that we have, what you might call, a qualitative mode around it. And then looking at how -- at which Tracey and David Doctorow are doing, looking at how the market really is going to evolve. House flipping, being a property pawnbroker is probably not yet. But the U.S. market is quite different to the Australian market in that most of the activity is on the buy side. In Australia, most of the activity is on the sell side. And we can see the nascent trends in both markets that you're going to have both buy and sell opportunities for us. And so that is our focus now.

Interesting. Okay. And then I think one of the sources of frustration for investors might be that you don't own the full asset, you own a majority stake. So how do you think about helping the market realize the value of these digital real estate assets?

Yes. It's true -- we're constantly reviewing the structure, what is the best structure. What we thought, genuinely though and it's not meaning to be evasive, is that we have to turn REALTOR around because #3, slow growth, not a good reputation, you don't have much leverage. We're now at a moment, and again, we're not cocky about it. I always take what Nick Caves says seriously. We are -- we have much more optionality, and I think investors generally who've stayed with us on the journey have seen the wisdom of that strategy because the valuations are being transformed. And this is still an early -- so when you look at the U.S. property market, it's fascinating. It is still at an early stage of digital or what you might call e-evolution. There's still a lot of print advertising now mentioned at Wall Street Journal. You should advertise and mention at Wall Street Journal. But you know in your house, right? You get -- every day you get some detritus through the mailbox. And the potential for us to take advantage of that very long runway is something we're focused on. But we do it knowing that a close relationship between REALTOR and REA is beneficial to both. And we do it in a knowledge that as a company, we have to be very conscious of investor return. And that's why we're institutionally prospective about the structure.

Great. And I want to hit on the book side of the business. So what is it that excites you about HarperCollins? And then any thoughts that you have on the DOJ suing to block the Simon & Schuster sale to Penguin Random House.

Yes. Well, I think the -- I mean, obviously, if you're [ press ] and candid about it. And I'm Australian, so I'm both [ press ] and candid. The longer that investigation goes on, the better for us. It's good for the lawyers, it's bad for the authors. And so we'll be watching to see if there are any meaningful bits that could fall off the back of that truck, at reasonable prices because as I said, Brian Murray and the team do a very, very good job of integrating. But more generally, it's interesting when you look at book sales compared to the pre-pandemic period, they're up around 22%. And there has been a reading reset in a way that's beneficial and it has been generally mostly printed books or could be -- plus audio. I mean, e-books finally now, if we were talking about this 5 years ago, I would have said quite wrongly that e-books would be an increasing share of the market, it was around 24%. Now, it's about 78% now. So fascinating how screen fatigue, the tactility of the book is increasingly meaningful to a larger audience. And for us, where we have to get better, our challenge is that books are not just a source of reading interest. They're -- you can create other content sense with books. And so HMH has a division which is very good at leveraging content. And we will see in September, as you know, Amazon is doing the Tolkien series, which we own international English language rights for, which was one reason why I was very, very keen to get HMH because we have permissions in the U.K. for Tolkien works that will enable us to do a lot of marketing through the extent of that series. We've been joking that people talk about NFTs, and so we've been trying to come up with nonfungible tokens.

Got it.

But it's a bit more generally, it just shows the book of itself has a value, an intrinsic value, but it's also a point of creative leverage.

Great. And in the last minute here, I want to sneak in 2 quick ones. Foxtel markets reported that there could be an IPO process, any thoughts or comments on that? And then the balance sheet, maybe you could tie into that buyback, how we should be thinking about capital return?

Foxtel, I'm not going to speculate about circulation. The Foxtel story is a good one. As I said, as we were chatting about earlier, there has been a renaissance. We have optionality. We're very conscious of investor return. And so the deep thinking and contemplation goes on. And the buyback, as you know, when we split, we had a buyback in place, but that was -- that was really transitional because of the disruption, 2 share classes, 2 country listing. This is a serious buyback. You can check through Australia disclosure regulations, how much we're buying back, you will see that we're doing it on a regular consistent basis in a way that is in line with the message that we were sending when we announced the buyback. So -- and what does that tell you that back to our earlier point, we have a lot more cash now. We have a lot more strength. We now -- we have the ability both to buy back stock in the investor interest and to invest in the investor interest when an interesting acquisition comes along at an attractive promise.

Excellent. Perfect place to end it. Thanks so much for joining, Robert.

Thank you.