News Corporation (NWSA) Earnings Call Transcript & Summary

Good morning, everyone. We might make a start. So I'm Kane Hannan, the firm's Australian TMT analyst. I'm pleased to be joined by Robert Thomson, the CEO of News Corp. Robert, thank you for joining us again this year.

Thank you, Kane. Thank you all for getting up early.

Robert, maybe just starting point. So I was interested if we can talk about how you're seeing the macro environment, how it's differing across the U.S., U.K., Australian market. So how you're positioning News Corp to capitalize on this for the year ahead?

Obviously, the contours of the economy is weary by country. The U.S. is in a different stage of the cycle, Australia, the U.K., which are our 3 biggest markets. Japan, quite a big market for us as well, particularly for Dow Jones and HarperCollins. They're just starting to get inflation for the first time in over 3 decades. And as a company, we have to respond intelligently to the different circumstances and take advantage, as you suggest to the opportunities. I mean, for us, it frankly has been a challenging year in the sense that about 60% of our revenues are international. So foreign exchange, inflation and interest rates. Economy, inflation, interest rates are linked to each other, but they've had a genuine impact on the way we've done business and have to do business. And some of those circumstances are changing, as I said, different stages of economic cycle in different places. But when you look at the potential impact of those consequences and circumstances. So for example, inflation has been particularly hard on any production business, so books, transport, raw materials, and you saw that in the HarperCollins numbers. ForEx, obviously affects our international earnings and back in U.S. U.S.dollars. And so added together, that was quite a challenge. And yet in the fourth quarter, our EBITDA was up 8% year-on-year. And the year before, overall, was a record year. And so you saw that we had real responses to genuine challenges. I think when you look ahead a little bit, as soon as seemingly plateauing interest rates in the U.S. actually do put our numbers, slightly descend. The mortgage rate will come down. The mortgage rate of 7.30 -- the mortgage rate of 7.3% is a real challenge for most Americans. And the people are making it -- having to make 2 decisions: One, about the price of a house; and two, about the price of a mortgage, which was not the case specifically 4 years ago. So Realtor will definitely benefit from that. And obviously, advertising related to housing industry for many of our media platforms will benefit from that. And the inflation challenge has started to abate, for example, at HarperCollins. And we said that Q4 margins were not acceptable. We're seeing harbingers of improvement in this quarter, and that is certainly the case. You have to wait until we announce obviously, but there's no doubt that the trend has changed there. And then overall, when you look at, say for example, margins, which you have to focus on all the time, but particularly the time of challenge. The -- in Q4, the Dow Jones margin was 24.4% compared to 18.8% in the previous year. So real growth. And overall, in a challenging year, our margin was 14% compared to 11.8% in the previous year. So there's no doubt it was a challenging environment, but our ability to navigate that gives us real confidence for our ability to take advantage of gradually more auspicious circumstances.

Maybe continuing on the margin point, you'll see, we did have the rightsizing of the business earlier in the year. So just how are you thinking about that now given some of those macro comments? I mean, are we at the right size, and the news needs to be a potentially some incremental investment? Or is there further optimizing that needs to be done over time?

Yes. I think you have to -- Kaizen, continuous improvement concept from -- inherited from Japan. It's real and it has to be real. And so these moments of deeper introspection about your cost base and ultimately, allocation of resource. Should be a catalyst for various -- I think we announced on average, we're going to reduce 5% of the workforce. We thought we would save around $135 million. We have actually annualized being able to save north of $160 million, well north of that. But what we've learned along the way is that there were some inefficiencies and you have to emancipate efficiency, not embed inefficiency. And I think we've learned from that process the areas we need to focus on more to -- frankly, further cut costs but also to ensure that we have the resource to make the most of our assets more generally. And where we have a comparative advantage is that we're able to compare. So we have similar businesses in 3 countries. We have the largest digital property business in India. And so we're able to make direct comparisons between and among those businesses to identify inefficiencies in the way that things may be done. And also obviously, to highlight the positives and take advantage of those and redeploy those learnings. And so -- that was definitely one of the lessons of the most recent cost cutting. Now everybody rather hire than fire. But longer term, if you're not maximizing the use of your resource, you're negligent to investors.

Yes. Then the other topic everyone has obviously been talking about at this conference, around AI. You have been very vocal on the issue. I mean you spoke at the recent call about...

Actually, I'm just getting started on AI, so -- hope you don't [ say lost ] to influencers like content creators.

Maybe just elaborate on those the comments a little bit more. Talk about how you see the threats and opportunities of [ AI ], that's where -- effectively how you guys are responding to it?

Yes. Okay, look, it's a big issue. It will -- in fact, every bit of most companies, whether it be customer service, whether it be subscription management, whether it be how you create code. I mean so -- it can't be the preserve of tech use culturally in any company. It has to be something embraced by everyone. And because they know best about their specialty. And so you need to have a confluence of the tech inside and the functional expertise. So there's that -- and that's true of our company, and frankly, should be true of every company. And then as a content creation company that has valuable IP, there's what I referred to as particularly for our news content and our HarperCollins archived content. There are 3 areas in which the -- clearly, there's a duty of care to us, i.e. you need to pay us. One is -- the -- generally by our engines, our training on archived material and extracting benefit from that; two, they're servicing specific headlines; and three, they're also extracting the editorial essence and repurposing it and deriving value from that. Well, they're deriving value from our creation. And so that -- there will be a big debate around that. It will be -- and that debate will play out in 2 ways: One, what's the value of the archive; and two, how much do you value updates. Because people, I think forget that -- AI -- generative AI is essentially retrospective. It's the perpetuation of permutations and instinctive, linear, not lateral, recomposition of content. That's what it is. It's a recomposition in many cases of our content. And so if you derive benefit from our content, we should derive a benefit or else then you're in danger of undermining the creation of that content. And when you look at the dramatic decline in a news room employment in the U.S. from 2009 to 2020, it's down, around 57% or more, depending on how you calculate it. And that shows you that the first wave of digital destruction has been profound. And that we're in -- we're in a position where there's an even more damaging wave looming. Then part from our direct concerns, there's another [ sector ] too which will become clearer to people over time, which involves, first of all, the IP overall. It involves antitrust and it involves a bias including political bias. And essentially, mistaken content. Because -- what does AI actually stand for? Does it stand for acute insight? Does this stand for abusing incoherence? Does it stand for the affidavit initiation, i.e., the beginning of legal action? And so what you will see over time, there's a lot of litigation. Some media companies have already begun those discussions. Personally, we're not interested in that at this stage. We're much more interested in negotiation, and we have various negotiations going on. We would prefer to reward the journalists, not the lawyers, who are the inevitable beneficiaries. But there will be for political reasons, obviously enough, that third element I mentioned about inaccurate bias content. I mean we're clearly doing a lot of tracking of the use of AI and our content. And we're certain AI engines that are churning out content -- apparent news factual content which is off the political spectrum, which would essentially make Marx and Lenin presented on [ grata ]. It's that left wing. And so how these things play out, particularly in an election year. These are going to be big issues. And I don't think the scale or the importance of the issue is easily understood. We can see it, and we're -- clearly, we're making overtures to different people at different times about have you seen what your engine has done, shall I say, spewing out. And I think even though, the more thoughtful, principled leaders of companies involved in the sector are starting to be concerned about what has been programmed. And don't forget -- look, it's rubbish in, rubbish out, rubbish all about, particularly with AI. And -- but the rubbish, the inputs may themselves be fundamentally flawed. But don't forget there's -- you're also seeing the effects, sometimes finishes of the bias of the inputter. These AI engines are a combination of the input and the inputter. And again -- so the idea that it's some kind of abstract black box that I don't know how on earth this stuff comes out, that's not an answer because basically, it's untrue.

A lot to think about. Last of a high-level question before we drill into some of the segments, but there has been obviously a lot of developments in the new portfolio through the year, whether that was the potential Fox merger, the move to have discussion. You guys obviously have a very healthy balance sheet and obviously the Foxtel for refinancing underway. Just talk about how you desire to continue reshaping the portfolio from here? Is it right to think that maybe Dow Jones is the greatest area of focus for the News going forward?

Well, we've identified 3 pillars of growth and have done for a few years, which obviously is Dow Jones book publishing and digital real estate. And it's clear that even in a difficult year they're core to our success. And with digital real estate and books, we would like to think that there's imminent upside. You're already seeing, for example, in the Australian property market, some more buoyancy than there was, say, 12 months ago. It will take a little longer here in the U.S. But the investments that we've made there, for example, in books with the acquisition of [ Harcourt Mifflin], Dow Jones, the acquisition of both Opus and CMA, which are already great acquisitions. And you're seeing obviously, their impact in the EBITDA margins of Dow Jones. B2B business is more profitable than B2C business. And over time, within Dow Jones and this year, in fact, we should see the crossing of the lines where B2B becomes the more significant segment. So we're absolutely focused on that. But that doesn't mean that, for example, whether it be Foxtel or any of the other news media businesses, they don't have a role because it's an inherent complementarity in those businesses. The News Media business has helped us build Foxtel. Foxtel has helped us build the News Media business. But what we do have, one is optionality; and two, we have continuous introspection about what is the right shape of the company. What should we look like in the future. And in the end, to maximize the return on our investments for our investors.

Yes. maybe focusing on Dow Jones then, as you said, obviously, B2B crossing that line and being a bigger contributor to earnings in the B2C business. Can you just talk about how you see those 2 businesses within Dow Jones playing out in the years ahead? Is there a target, I suppose, how higher B2B will get to? And just broadly, the drivers of growth in the next 3, 5 years?

The Dow Jones target is higher, higher much higher. That's the target. It's hard to be specific, obviously, okay. But just on those 3 pillars in a difficult year for digital real estate and books, they accounted for 57% of our revenue last fiscal and 5% of our EBITDA. So that gives you a little bit of a sense in a tough year of how important they are and clearly a lot -- they throw off a lot of cash. . For Dow Jones, the PIB revenues last year were up 31%. And what we've seen, for example, is risk and compliance since the split. Revenue has grown sixfold. We're seeing quarter after quarter, year-on-year, double-digit increases. And -- we announced it every quarter, and you can see it every quarter. And you can see the impact not only on Dow Jones, but actually on the News Corp balance sheet. And we expect -- we have high expectations for both Opus and CMA that a similar pattern will emerge. We'll be disappointed if it's not quarter after quarter, year after year double-digit growth in revenue, high margin revenue. And so we continue to look for opportunities. We are very fortunate with the acquisition of Opus and CMA in sometimes frothy market. Those were disposals necessitated for regulatory reasons, and we were able to take advantage of that. So very reasonable price for a very productive asset.

And you had accelerating digital subscriber growth through the year. If we go back to the Dow Jones Investor Day, I think we were talking about targets of around $7 million to $8 million over time. Talk about how you're balancing subscriber growth versus ARPU in that business? Whether those $7 million to $8 million target is still how we think about I suppose that business over time and its target?

Yes. Look, depending on what your time frame is, it should -- frankly, it should be a higher number than that over a period. We saw digital subs at Dow Jones increased 12% last year. And interestingly, international subs up 14%. International is only 12% of the subscription base at the moment. And we do see it as an opportunity. And both Almar, the CEO; and Emma, the new Editor-in-Chief at The Wall Street Journal and Dow Jones, are very international by nature. They have a lot of experience in between them in Asia and Europe. So clearly, we see an opportunity for an initiative for a very attractive global cohort. And that's a demographic that's valuable not only in circulation terms but in advertising terms. And so over a period through initiatives that we're taking here with the bundling strategy, which obviously in the shorter term, can mean that there are discounts on balance or whatever. But at the same time, we all know that in any subscription business, there are 2 challenges. One, acquisition; and two, churn reduction. And so over a period, the team fully expects that the churn rate will come down, the ARPU will go up because of the initiative that they've taken at this time in bundling. So there'll be a phasing impact over time, but they're very clear about the fundamental strategy.

And that 12% of subscribers outside the U.S. for -- The Wall Street Journal. Talk about some of the strategies, I suppose, to grow that internationally. And if I think about an international subscriber, I mean, are they valuable to the WSJ, is it domestic? Do you think it had the same [ millions ] today?

Really, thoughtful question. It clearly depends on how you're targeting, who you partner with, for example, in Japan, we have a great partnership with the Mainichi Group. They understand the audience well, in some ways, they understand the audience better than we do, but they know what the target demographic is. And so with their help, we are launching a fresh initiative there in France. We have a small stake in a paper called L'opinion which started by the [Foreign Language] Nicolas Beytout. He is a cornerstone of our subscription strategy there. Obviously, in the U.K., we have great assets that we can leverage and will do. And it's how you have to make sure that you're targeting legitimate customers. And frankly, that your offers are not churned based. And we're very conscious of that. And partly, it's the lessons we've learned in the U.S. that will inform the strategy but also understanding what are the right demographic cohorts to target. And because it can't, in any way, be an exercise in ego extension, it has to be an exercise in product extension.

Yes. So obviously, it's a much smaller part of the business but just the advertising market, whether we're in both the Dow Jones and News Media. Is there any comments you can make, observations you make around the ad markets, if there's any green shoots starting to emerge? Just how you're seeing ad markets tracking?

Yes. I prefer blossoming flowers to green shoots. But it again really -- it's hard to be a soothsayer in a market that has been somewhat volatile. You're starting to see in this country, the return of finance and tech advertising, which is obviously great for Dow Jones for MarketWatch. You -- and in Australia, Clearly, with the end of COVID, you saw an explosion in travel-related advertising, particularly external travel. So we're still seeing the playing out really of trends that are either what you might call consequences of long COVID in an economic sense or our readjustments to, for example, a changed interest rate environment. And so overall, we're seeing improved trends, but it would be wholeheartedly to say we're going to see double-digit growth in Q2 or whatever because we just don't have that level of visibility. And the other thing, given that you have a changing market where actually opportunities are fluctuating. So for example, we noticed now that airlines are starting, at least, outside Australia, airlines are starting to put on more flights, for example, into the U.S. The aviation market is starting to be a rich source. And sometimes that's a national market and sometimes, for example, it's a New York market or a California market. And having the ad teams tuned to the ebb and flow of those trends is as important as the trend itself.

Yes. If we think about digital real estate, maybe move specifically, Damian coming in as CEO, he's usually competitive, focused on regaining share in what a tough and improving macro environment. And how I think about what that could mean for moves that are in contributions in the near term? I mean would you have the appetite for things to go negative if there was confidence in really retaking some market share?

Our strategy now and Damian is a very aggressive competitor, a principled aggressive competitor. And I think you'll see the fruits of his toil fairly promptly actually. He -- what he absolutely has and this is -- I must pay tribute as well to David Doctorow, his predecessor. David made some very savvy acquisitions, which have given us a platform for the future. Damian's background in the company means that he's able to do in the U.S. what we were able to do with REA in Australia, which is take advantage, full advantage of our platforms to build the business in a way that frankly, other competitors don't have the advantage of. And it was actually Lachlan Murdoch's initial insight when he made an extraordinary investment in REA, what is now an unbelievable multiple. I mean one of the -- really one of the great investments, not only in Australian commercial history, but globally, that he would take advantage of those platforms, and it benefited both. And so it clearly is to the benefit of the Wall Street Journal in terms of subscription targeting to have great insight into certain ZIP codes. It's clearly a benefit to realtor to have the advantage of inventory and prominent placement on -- that we shared on MarketWatch, Barron's, our other sites. And there's a wonderful emerging relationship between Damian and Sean Giancola, the CEO of The New York Post, who is -- who can immediately see the benefits to the Post of that developing relationship. And even in the last couple of months that there have been 1 billion impressions for realtor on our various sites. Now quantity of impression is one thing. The quality of impression is what we're working on now to make sure that each of those impressions is beneficial to the business -- to both businesses ultimately. And so we don't have to talk about going negative. What we have to be positive about is taking advantage of those assets.

So the main -- I suppose Damian may change into bringing -- is utilizing the News Corp assets more than a pivoting out of any of the adjacent markets he's been focusing or in of a bigger strategic changes?

Well, I would say it is of itself a big strategic change because it's a sensibility change. And you will definitely see the benefits of it in coming quarters. And what we're also doing is preparing to take advantage of the inevitable changing of the tide in the market itself. Because when you look at existing home sales, they're obviously at a very low level, historically, low level. We all know why that is. At the time of relatively high employment, very low unemployment, at a time of wage growth at a time where many people still have significant savings, you would expect there to be more activity in the housing market. The problem is pure and simple is the mortgage rate. I would just -- what you will see for housing generally, as that mortgage rate goes down, opportunity in the property sector goes.

If you think about Foxtel, you're entering the third year of the 3 strategies that we spoke about in a number of years ago. Things broadly tracking in line with those targets from a financial perspective. Just interested to get your take on, I suppose, Foxtel, where it's at in it's evolution. Do you still see a big subscriber penetration story ahead? Or the more around driving yield per subscriber? And then maybe just worth touching on I suppose the aggregation strategy and then what that could mean for your financial aspirations over time?

Yes. Well, look, Foxtel is a transformation story and Siobhan, Patrick and the team deserve a huge amount of credit. Anyone that -- one of these conferences a few years ago would have been aware that we are being asked, how much more money do you have to put into Foxtel. It's all public, the amount of loans, the amount of investment, extra investment we made. The question that we should be asked is how much are we going to take out of Foxtel. So we have real optionality there. And it is basically because we have made the transition into streaming in a way that's very different to the U.S. market. I mean, obviously, you have the [indiscernible] Disney [ country top ] here right now. But that's not going to happen in Australia because we have both the best sports service and the brilliant platform for delivering them with multiple means of delivery. So it's not a contradiction. It's not -- there's an inherent contradiction in this market. There's not such a contradiction in Australia. And you see that even though our streaming services continue to gaining market share and overall numbers, but actually, the broadcast churn rate has come down significantly from about 14% down to, I think, 11.8% in the most recent quarter. And so it shows you that the sort of questions and rightly, there were being raised the concerns that investors have, well, if you go to streaming, does that mean the ultimate demise of broadcast. Those questions have been answered in very eloquently by our strategy there. The key over time is and it's the same as the WSJ subscription strategy, acquisition and retention. And people learnt how to stream and they've learned how to churn. And the -- you have to give them every reason not to churn. And so for example, with Kayo the sports service, it's -- when you come out of the big winter sports, what is your strategy for making sure that October, November are not churn months. And that's where the teams have done a lot of work in the last couple of years, a lot of learnings, and that's something is controllable. And so how we take advantage of what has now the accumulated intelligence expertise should be reflected in those numbers.

And if I think about the comments around churn and then trying to manage churn, I mean, how do I think about, I suppose, the price rises that went through there, what impact that might have on churn? And I thought your learning around the pricing power of these streaming services that have from here?

What we learned is that both Kayo and Binge are value for money because the response was not a sudden mass migration away from the products, and they are value for money. When you look at what you get from Kayo, which is -- again, it's very different to the sports offerings here. ESPN wishes it was Kayo in its dreams. And -- because you have such a complete offering of the key Australian sports -- the Rugby League, Aussie Rules Cricket and many and varied other sports in a complete -- and it's not just the sport, it's the way the team presents the sports. And it's clearly superior to the [ terrestrial ] product. And people can see and feel the difference. And that difference is of itself valuable.

And lastly, book publishing so that initially in terms of the Q4 performance and in terms of the trends changing earlier this year. What are you seeing, I suppose, in terms of consumer demand hinting that industry? How do I tie that up, I suppose, with the frontlist titles that you've got in the market, I suppose easier comps without the undergoing issues coming through in the first half? It's just -- so how do we think about the year ahead for books?

Well, this will be a good year for books. And it's right to be far more positive than we were realistic about the challenges last year. You can't be anything other than realistic. I think we're realistic also about the opportunities this year. Both in relatively speaking, the change cost base, where the frontlist is excellent. Frankly, we didn't have enough bestsellers. That's on us. But I think the team has pivoted intelligently and creatively. So we're very proud of the suite of books we have upcoming. It is fascinating how audio books are still on the increase. In an industry where when I first took this job on about 10 years ago, there was presumption that e-books would be around about this year, 40% or 50% of total book sales. E-books are down around 17% at the moment, and it's audiobooks that are on the rise. And we've got some -- I can't talk about it in specific detail now, but some really exciting plans for e-books in the -- next audiobooks in the next month or 2, which you will -- which you'll hear about, to take advantage of that growth. Because the streaming of audio in every respect is something that, as a consumer we're far more comfortable with. And so -- and then when it comes back to cost, the team learned a lot over the experience of the past 12 to 18 months. Clearly, it showed that we have to be absolutely focused on raw material costs, the logistics want to be transporting, materials to the printing plant or from the printing plant. So all of that focus of itself has improved the performance of the business. And we indicated on the Q4 earnings call that margins would improve. And I'm fairly confident they will.

And in terms of that improving margins, I mean, when I look at books pre-COVID, during COVID, there was that step change in profitability that came through. And then we've come through as far as more challenging year. Should I think about it as a pre-COVID sort of profitability, we're going back to a more normalized environment? Or do you think there has been a step change with the acquisitions and some of the work that's been underway?

Well, I can't be specific about it. Look, COVID really distorted the book market. It turns out, but if you have lockdowns and people aren't allowed to leave the house, they read more books. And so in that sense, we're in favor of lockdowns in a literary sense. But what it also meant is that there I'd say, people bought a lot of books that they didn't finish, they may have read the back cover in some instances. And so what you find is a physical product, particularly one that has an intimacy like a book -- when you see those books sitting by your bedside table, on the kitchen table, or hidden away in an overstuffed book case, those are -- almost remind us to stop buying books. So I think people -- we've worked through some inventory issues. I think readers have worked through some inventory issues.

Robert, we're out of time. I really appreciate your thoughts this morning, and I look forward to catching up soon.

Great. Thank you all very much.