News Corporation (NWSA) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to the next session at the TMT Conference today. My name is Andrew McLeod. I work for Morgan Stanley's equity research team based in Sydney, Australia. I'm joined up here on stage by my colleague, Sean Diffley, from Morgan Stanley specialist sales team in New York. News Corp being such an interesting company. Robert, taking two of us up here to host you and make sure we cover all the topics that investors are interested in.

So here's the good cop and here's the bad cop. That is the harsh life and telephone book.

Yes. That will become obvious as we work way through the discussion, I think. It's our great pleasure to have Robert Thomson, CEO of News Corp, with us today. And as I said, at a very, very interesting point in time for the industry, a very interesting time for News Corp as well. So we're really looking forward to this discussion. We've got 30 minutes of Robert's time. Before we do get underway, let me just read out the requisite, the disclosure. Anybody here who needs detail, please go to the Morgan Stanley website for disclosures www.morganstanley.com research disclosures or reach out to your Morgan Stanley sales representative for more detail.

So with that out the way, Robert, thank you for your time. As I said, very interesting point for News Corp and for the industry at the moment. I thought a good place to start would be to ask you what are the main strategic priorities you're working on for the year ahead? That could almost take us 30 minutes.

Yes, it could. How long do you have? But well, look, first of all, when you look at the picture of News Corp, as we're -- as the strategy is unfolding. Is it, what you would call a cryptic. In first of all, we're focused on the engines of growth, which is digital real estate, Dow Jones and books. Books have been a little soft covered of late, but they will return to their the natural places an engine over time. Secondly, we're focused on the network effect of the [ News Corp ] digital properties and the value that each property brings to the other more than the sum of the past. And so I did a little checking before coming here. And in the month of February in the U.S. only and not all of our websites, not including HarperCollins or related companies. We had a 2.2 billion page views, which is 10, slightly over 10 page views for every adult American. And it gives you a sense of that scale that we have to leverage each property for itself and each property for the other. And we're definitely focused on that because whether it's creating demographic cohorts whether we've been advertising, it's creating what we call super segments, whether it's finding leads for realtor of Wall Street Journal or subscriptions for Wall Street Journal of Realtor. That's an absolute priority for us. And the third bit of the triptych is being hard and realistic about the economic conditions that we're in, and we are cutting costs. So we've already announced that there will be a global 5% reduction in the workforce. That's about 1,250 employees by the end of this calendar, most this fiscal, and we expect the annualized savings to be at the least $130 million a year. No, it's not something you want to do, but it's something you have to do in these circumstances to build on what is robust platform that's very different, and Andrew has covered the company for a very long time, very, very different to a few years ago. One interesting metric was that in fiscal '17, we had EBITDA of $885 million and free cash flow of $243 million. Last fiscal, we had EBITDA of $1.67 billion and free cash flow of $855 million. So it's a very different News Corporation. We no longer have amplifiers, which I remember you had views on. We probably didn't disagree with your views. And it's very different in its ability to generate both profits and cash and give us the flexibility even during times that are not necessarily economically auspicious to do well.

Great. That's an excellent introduction. Thank you, Robert. And I wanted to follow up on the strategic exploration. So now that we've finished the Fox News Corp talks what's next for News Corp in terms of the strategic simplification? And maybe you can talk a bit about the move process where CoStar was looking and has backed away. What do you think investors should understand about those two processes.

The -- obviously, the merger, the proposed merger, look, scale is important. I thought it was a very good idea. Not only would it give you scale in terms of share size, it gives you scale in terms of financial resources. It gives you scale in terms of extended expertise and specific expertise like video where Fox is so strong, whether it be through broadcast or Tube. So there's no doubt that it would have been holistically beneficial but for the time being, it's something that's in a balance. But -- and the reason we had to put the talks on hold was indeed the what you might call flux in our real estate segment, i.e., in particular, the approach from CoStar to buy REALTOR. And look, I have to say, to be very clear, we had no intention of selling REALTOR. We were courted, we were wooed with a significant sum. What it did do -- so one thing for certain is that we have no intention of being the [ Miss Havisham ] of housing. There is naturally been a lot of other interests several other parties have expressed fascination, shall we say, financial fascination with REALTOR. But what we can't -- given that there is so much flux in that sector, the most important thing for us now is to focus on driving REALTOR, which is why personally, I've made a priority of why we've put at the disposed or shall we say, of the REALTOR team inventory across News Corporation. So if you look at wsj.com or the New York post website or The Sun U.S. website, which is a remarkable success story. We'll soon be generating more revenue digitally than the original Sun website. And so there's no doubt that we have a lot of potency in those platforms, and we are very much taking advantage of that. And we're testing a lot of what we call interstitials modules, not only AB testing, we're AZ testing and driving a lot of traffic to REALTOR. So in the last few weeks -- not 3, 4 weeks, actually, they've been of the order of $120 million incremental impressions generated for REALTOR via the inventory. And it just shows you, back to the power of scale and complementarity of platforms, but it also just shows how much we believe in the future of REALTOR. And there's a particularly interesting opportunity now because the U.S. market is very different to the Australian market, and we have a couple of our Australian colleagues upfront in the second row who should come and question. If you want to understand the Australian market or even Australian culture, which I have to say is unfathomable. But the -- in Australia, most of the digital real estate business, what you call a sell-side business. In the U.S., it's a buy-side business. It's hard to generate a sell-side business when properties are selling very, very quickly, right? There's no delay, why do you need extra help? Why does the realtor, why does a vendor need help. In this market where you have a big buildup of inventory where you have rights -- mortgage rights again on the rise after the intervention at least by word of the Fed in recent days. It's a great opportunity for us to develop what is potentially a very lucrative business. And so that's the other thing that we're very much focused on. So yes, we were indeed courted, we were indeed wooed, and we're getting on with it.

And maybe you could just talk to the simplification strategy that you've outlined. What does that look like now?

Yes. Well, I should say, by the way, we have a lot of respect for CoStar. And personally, I like Andy Florance very much, but I love REALTOR. As for simplification, it's -- not just a slightly misleading word. I think when people talk about simplification, I know they don't mean reductio ad absurdum. I mean it's not simplifying down to tell. It's in part being more transparent. And I think back to Andrew, when you were covering a company when we first released it off almost 10 years ago, we did have Amplify. We had News America Marketing. And we quite frankly, it wasn't clear to investors precisely how valuable Dow Jones was, for example. And that capacity was a disadvantage for us. It was just a value for investors. And so part of simplification is transparency. So for example, by breaking out Dow Jones in the last couple of years, not only does that highlight Dow Jones, but -- and the Wall Street Journal, but it also highlights the rest of the News Media segment and that frankly, puts pressure on it. So more broadly, when we talk about simplification, it's obviously remaining open in mind about opportunity, a big opportunistic when the moment arises, as it almost did recently. But it's also looking at -- for investors, for the company, what is the best course of action to generate transparency? Because look, clearly, there is a big difference between the current share price and the net asset value of News Corporation. We're not unaware of that. And making the most of the assets we have which might involve simplification, is imperative, not just important but also helping people understand what is the trajectory of the company.

I guess somewhat related investors always ask, is it possible to spin off REA or REALTOR move? How do you think about that from here?

Well, look, we have a lot of optionality. REA is itself a great company. It's sort of technically spun off anyway. But the -- and the most important thing for REA is to take advantage of opportunities. We now have via REA, the largest digital property site in India. What's that going to be worth in 5 years' time, 10 years' time. And so you wouldn't want REA to be distracted by bureaucratic shenanigans, but at the same time, as you can tell, we remain open and opportunistic.

Perfect. I might switch the discussion to talk a little bit about advertising, Robert. We got two parts to this question. Firstly, if you could to your insights because your assets are broad, as you say, different geographies and different segments in the U.S. as well about what you've been seeing in the advertising market. And secondly, I think it's important to spend a moment on the evolution of advertising being a smaller part of the business now as well. Not only has the business grown over the last decade and broadened out your revenues and EBITDA. But more subscription, less advertising, but we still -- investors still need to be mindful of advertising trends.

No, absolutely. And also a lot more digital and a lot less print clearly. Advertising varies really product by product, country by country. Advertising at Dow Jones last quarter was down around 7%. And our Australian -- a news media generally, it was down 13%. But in local currency, i.e., in pounds and dollars, and the exception here being in New York Post, which is U.S. dollars, was down 93%. And so it's -- what we're generally seeing is that yields are coming down somewhat. We're certainly taking advantage of any free inventory we have in this country to boost REALTOR. But where you're exceeding the decline in yield with increase in traffic, and that's 2 sites, in particular, the New York Post and The Sun U.S., you're actually seeing advertising revenue still rising. And quite dramatically so The Sun U.S. And so I think that puts us in good stead for longer-term advertising trends because we're -- let's face it, the trends were facing just now, these are transient trends. These are, as I said on the recent earnings call, more a femoral than internal. And when a CEO is asked to cut costs. The first thing they do is hit marketing because it's easy. It seems easy. It doesn't involve the empathetic difficulty of making people redundant, right? It's hard. Nobody wants to do that, but [indiscernible] what is marketing. I mean marketing is communicating with your customers and your clients. And so that initial phase of cutting marketing, if people are cutting themselves off from their customers, they're doing themselves longer-term damage. So I think we're just about through the worst of that downturn, I suspect. But we are -- it is said that this is the waiting for [ GoTo ] recession, but unfortunately, it was a wonderful piece of the Wall Street Journal today. And I have to -- by the way, we have the new editors of the Wall Street Journal, Emma Tucker in the second row as well, if there's anything you've seen in the journal that you'd find offensive, come and tell Emma, it's her fault. But -- so is it the waiting for GoTo recession, I think that the recession is going to arrive before GoTo personally.

So we want to go back to book publishing as interesting as Wall Street Journal is, you had mentioned we've seen a bit of a slowdown recently. How much of that do you think is purely cyclical? How much of that is structural? And then Simon & Schuster back on the block. Is that something you might have some interest in strategically.

Well, even if I had some interest strategically, I couldn't tell you about it. But it's the book business because the book business is what you would call a steady earner over many, many years and then came to pandemic and probably unsurprisingly, if people are forced to stay at home if they cloistered at home, then they read more. TikTok alone is not interesting enough. And so the book sales went up. And what we were a little uncertain about was how much the pandemic trend would be a post-pandemic trend. And it's fair to say it has come off a bit. Secondly, you -- as you will all be aware, Amazon has been making fundamental changes to its logistical system, the warehousing, the whatnot. So the number of books that they were buying and storing came down. So that had an impact. And then -- the book business is a physical, it's the most physical business we have. It's 75% physical, 25% digital, digital made up of e-books and audio. Audio is still growing relatively, e-books fairly flat. And because of that, you have paper costs, printing costs, trucking costs, warehousing costs, which is significant. And so the combination of those three factors affected the business to the point where EBITDA was down around 57% in Q2. We're starting to see more positive trends now, first of all? And secondly, to be honest, our front list, was a little insipid. The front list has picked up quite significantly over the past 2 weeks in particular. We have Ron DeSantis and Colleen Hoover, not two names that you normally hear. They haven't jointly written anything, but both of them are rising faster in the best seller list. And you'll see smattering of HarperCollins books under the different imprints turning up. So that will make a difference. So I suspect that both the Amazon reset and the reader reset are over, and the rest is up to us.

I know you're an avid reader. What's the most interesting book you've read recently.

You'd love if I told you, Somerset Maugham's short stories. If you want to read great writing, that's great writing.

Good. I wanted to change tack and talk about the Australian Pay TV business, Foxtel, that some people in the room would have heard of, but not necessarily everyone. It's an asset that I actually thought was pretty structurally challenged a few years ago, but some credit to the management team in -- they've had some wins recently locked up some very important programming rights, sports rights and entertainment rights in Australia. How do you feel that business is positioned now, Robert, for growth? And is it potentially part of the simplification story as well. It's something you've spoken about in the past?

What's -- you do know better than anyone, Foxtel wasn't held in high regard. I think, to pretty euphemistically a few years ago. But Siobhan and Patrick and their trusted team have done an extraordinary job building up content sets which are unique, both in sports and entertainment, doing an excellent job of transitioning from broadcast to streaming. So streaming now is 62% of the business, and that's been done while bringing down broadcast churn rates, which was clearly the cannibalization threat that people understandably talked about 3, 4 years ago, which hasn't materialized. Last quarter in Australian dollars, so adjusted their EBITDA was up 63%, their revenue up 3%. And as you would know better than most of us, the Australian economy has been a little dodgy. So those are excellent returns. And it gives us real optionality in the future. And we -- so long-term sports rights, we don't have to worry about 3-year windows or 2-year windows. We've got up to 2031 on a couple of the biggest sports. And look, the other thing that Foxtel has done, has proved it's a great partner and that we use our other media platforms to promote emerging sports like Women's Rugby League, Women's Australia rules, which are taking off and increasing the value of those rides. So overall, a company frankly, Susan Panuccio, our CFO, and I would go to investment conferences and the question was always how much more are you going to have to wit into Foxtel. That's not the question we're asked these days.

And we want to turn back to Dow Jones, and you had two recent acquisitions, OPIS and Base Chemicals, maybe for the uninitiated, what are those businesses? Why did you acquire them? And how is the integration going?

Yes. I'll aggregate a description of the two related OPIS focuses on energy prices and building out into renewables. CMA is chemical market used to be called Base Chemicals. It's now Chemical Market Analytics. And they are doing very -- they're very high-margin businesses. They're 100% digital subscription businesses. So as you were saying earlier, Andrew, less reliance on advertising, they -- you saw the early impact because professional information business revenues rose 45% in Q2. And so -- and along with those two, you had a 20% increase at risk and compliance. And so overall, those businesses, they're high margin, the margins in the 30%, they are businesses on which we will build. And particularly, when you look at the potential for renewables, creating carbon indices, and creating products that at a time when both companies and regulators are looking for authentication, OPIS will be very important. And you go back to risk and compliance. The fascinating impact of increasing government intervention on that business. So it's grown quarter after quarter, double digits. And there's no reason why that should begin to build given the inherent demand.

Great. And I wanted to ask about how investors can better recognize the value of Dow Jones and Wall Street Journal versus New York Times. Mr. Florin in the front row, he does a good job of trying to articulate that. How do you think investors can better understand kind of the differences and seemingly Dow Jones is very undervalued within News Corp versus some of its publicly traded peers.

It's a very different -- we have a -- both from subscription and from a holistic perspective, it's a very different strategy. So the New York Times is what you would call a horizontal cell. So you have the New York Times, you had wordle, you have sport and you have recipes. And there's not a natural upsell there. Whereas we have MarketWatch. We have the Wall Street Journal. We have Barron's, we have Investor's Business Daily. We have specialist products. So that's why Almar and the team are focusing on more bundling and the benefits of that you'll see in successive quarters. But it also means we can take advantage of the very high-end professional information. So premium content for a premium is a strategy we have. It's just -- the upsell is a lot easier and more logical for readers and particularly professional readers that are cross sell. So that's the fundamental distinction between the two. And longer term, we're confident in our strategy.

Robert, can I ask for your thoughts on the big tech relationships you have? Because having watched the industry for a long time, I think you are very much the architect of those relationships that were transformational in many ways. So I'm just interested a few years down the track to hear how you think -- how that relationship has evolved. And also, there have been some comments in the press from those -- a couple of those parties about a bit of a pivot in their new strategies. Is that a good thing or a bad thing? Is it -- what does the future hold for your big tech relationships now, you think?

Well, I think it's fair to say that News Corp, thanks to Rupert, Lachlan and the News Corp Board, we were a very solitary voice arguing for proper recompense for professional journalism because journalism was under an existential threat. We have made advance. We have very good partnerships now in some countries with Facebook, Australia in particular, globally, with Google. We have a great partnership with Apple, where Microsoft are a very good partner. So at that level, the situation is for content, it's changed fundamentally. There's a lot happening in ad tech because in my mind, if you go back, I always thought there were two pillars. There was the proper value for content and a less dysfunctional digital ad market. So that's playing out. I was in Italy a couple of weeks ago. The Italian publishers are now negotiating with the big platforms, and they accept -- there was a preset that News Corp created that allowed them to engage with a certain amount of leverage, but the fascinating emerging issue is generative AI. I mean, for us, it can't be degenerative AI. It can't destroy value in the way that early phase aggregation did. And if you think about -- and so we're spending a lot of time examining it. We've started discussions with a certain party, they'll shall remain nameless. But there are three components to it. So it's the -- as these AI engines are being trained and they're using professional content to be more professional themselves. And so the people -- certain people talk about open source. Well, clearly, they are using proprietary content. There should be obviously some compensation for that, particularly and the more specialist, the engine gets, for example, in business, they're obviously using Dow Jones content. Then you have the actual servicing of articles through AI and there should be compensation for that. And then the most fascinating one, a lot of these engines are focused on synthesizing aggregated content. And that's often our content. And they would argue that by synthesizing it and extracting the essence of the content, they're providing a transformational service. We would argue that they wouldn't be able to provide any service without our content. So there are 3 tiers where we're entering into discussions, shall we say, with different companies.

Great. And we want to close out with thoughts on capital allocation priorities. So M&A, you've been acquisitive over the last few years. How do you think about M&A going forward, valuations have come down? Where do you think the most interesting opportunities could be? And then maybe you want to hit on how you think about buybacks.

Well, on buybacks, first of all, if you look closely at the Australian regulatory disclosure demands that we disclose. And so you will see that we are indeed in the market. We have a $1 billion buyback provision, for a period, we weren't for reasons that probably obvious, the close watchers of the company, but we are certainly back in the market at the moment. We're always institutionally in prospective about capital allocation. We obviously have a dividend. We clearly believe in buybacks. We are always wondering what the right structure for the company is. And that, frankly, that's another reason why the merger -- potential merger was so fascinating. But we are in a position where we have the luxury of optionality in the way we allocate capital. And you've seen with the external investments we made at Dow Jones by OPIS and CMA. The logic of that should be obvious to investors now, and it's up to us to make the most of it. You can see with the buyback that we do believe in maximizing the returns where appropriate. And at the same time, we're absolutely committed to finding more ways of reducing that gap. In part, it's a perception gap, maybe in part, it's a capacity gap between the current share price and what any same person knows is the actual value of News Corporation.

That's excellent, Robert. Look, we've probably got time for one question if there's a question in the room at all? Actually, I don't think I can see one. So given we're up on time, Robert, I'll let you off the hook there. Thank you very much. Thank you. Thank you very much for your time. Thank you for putting up with two moderators, coming at you double barrel. We appreciate it very much, and look forward to talk to you again.

Thank you, guys. Thank you very much.