News Corporation (NWSA) Earnings Call Transcript & Summary

Okay. We'll get started. Again, I'm John Hodulik from UBS. And I'm here with Brian Murray, the President and CEO of HarperCollins Publishers, the unit of News Corp. Brian, thanks for being here this morning.

Thank you.

So we've got 35 minutes for questions. I've got a number of questions to run through. If anybody in the audience has any questions, there's -- you can use the app and I'll see them here, and I can work them into the conversation. So Brian, why don't we start sort of big picture. What is the current state of the book industry and HarperCollins' sort of place in that industry?

Sure. The market in the U.S. has been increasingly robust, I would say, as the calendar year moved forward. In the very beginning, it was sort of a little bit flattish to up a little bit. But starting in May, we really started to see consumer spending lifting quite nicely. And if you look at public data from the American Association of Publishers, they've published through September, you could see July and August were particularly strong. September was okay. But that quarter, really nice lift in consumer spending. And I would say HarperCollins in that mix, we've been on a good run. We've had a little bit of a lift in market share in a rising market. And so we're pretty -- we're feeling pretty good about how the year may close out. And the reports we're getting from retailers are that there's healthy traffic. Barnes & Noble reported they've had good store traffic. So we're all hopeful that this is going to be a good holiday for the book business.

And what drove the strength in July and August for the industry? Is it more economic stuff or titles or...

I think it's a little bit of both. We definitely saw a little bit more retail competition starting in May, June and continue through the rest of the year. The number and the frequency of retail promotions, I think, not just in book category broadly, but then we also saw the knock-on effect in the book business. There was a lot of promotional pricing that was happening. I think consumers really responded to some of the aggressive promotions in the marketplace, and we've seen a lift there. And then HarperCollins, we were lucky to have in our back list J. D Vance's book. And when he was announced as the Vice Presidential candidate in July, avoided sales take off, and we reported just in that quarter. I mean, it's amazing. That book has had 3, 4 lives for us. It was a very nice success. In 2015, I think it was, when we first came out. But then when Trump won, the Republican nomination back then, people were pointing to J. D. Vance's book to understand who was voting for Trump. And so we had another wave. That was the second wave, and that was a very big wave. And then a film was made. That was the third wave. And now here we are again. And you think already, we've sold 4 million copies, but there's 350 million people in the country. And here you go, he's Vice Presidential...

And I assume he's going to be in the pull position 4 years from now, right? And you'll get in the other way...

Let's hope. That's sort of our business model in a lot of ways as we try to publish really good books, and if we're lucky, those individuals go on to be very well known in other areas or books get made into film and television. And so building our catalog is really a key strategy at HarperCollins to try to have great books in our back list so that we can get several bites of the apple.

Makes sense, yes. So on that note, can you give us a sense for what the -- at HarperCollins, what the sort of main focus is for management in terms of the growth drivers of the company.

Sure. So we have -- there's always a set of organic initiatives that we're looking at, how we can grow in the market because typically, book publishing market spending grows 2% to 3% per year. So as management, our goal is to try to double that. And so that -- we really run a big portfolio, a big -- we're making investments in new books, new storytelling, new authors all the time. And while the spending on books may be growing modestly at 2% to 3%, there are certain genres where we'll see a tremendous amount of interest. So recently, we've really seen a lot of particularly young readers, a lot of young women have been reading voraciously in the romantasy. It's kind of a combination of romance and fantasy. That is a booming area. It's been booming for the last 3 to 4 years. And so that's just an example. And so at HarperCollins, we're trying to always anticipate where do we think the readers will be in 1, 2 or 3 years and make sure that we're placing the right proportion of investments in resources and into acquiring authors that write in those areas so that we can grow faster than the market as a whole. So we've seen recently, there's been a little bit of a decline in nonfiction book buying, but there's been more than offset by fiction. And I think it's just the world we live in with all the geopolitical risks, I think the economy, I think our election, I think a lot of people are trying to escape into other worlds and fiction is where they're going. The more serious nonfiction market has been down a little bit. And that's okay with us as long as the overall spending continues to grow. And as I said, it's up quite nicely this calendar year so far.

Makes sense. The digital business and more specifically audiobooks are the fastest-growing portion of your digital business. It's been around a while. So why has it accelerated in the past few years?

Well, the audiobook format, it has been the fastest growing. It's eclipsed for us now, the eBook format. And I think what's happened in the last year really has been, again, competition. When there is a brisk competition for the consumer, the suppliers benefit, the creators benefit. And we've seen with the entrance of Spotify, audible has continued to grow, but they've had to lift their game. And consumers have benefited, the creators have benefited. And I think what, Spotify entered in a very smart way. They had several hundred million listeners of music and podcasts. And so it was a very small adjacent shift for them to monetize the audiobook listener. And what they were able to do, I often think audible kind of had that core audiobook listener, probably listened to a lot of books a year. They had been -- had sought out that format, whereas Spotify was able to monetize the more occasional audiobook listener because they had this very large consumer relationship with music listeners and podcast listeners, and you didn't have to sign up with a full commitment with so many books per year. You could kind of do it with your 15 hours free, you could sample. And I think that, that entry strategy. I mean, we now know a year later, that entry strategy has been very successful for Spotify. And as a result, we kind of get a little bit of an incremental growth in our business in total, and we've seen continued growth from Spotify and grows from audible. So a really good outcome for publishers.

I'm surprised to hear you say that audiobooks is bigger than e-books. That's in terms of total revenues. It's bigger than the e-books you saw.

For HarperCollins, that's true, yes. And the e-book format had been declining for us and then the market has been very soft for the big publishers have been coming down a little bit. I think during the pandemic...

Are the people going back to pay for book.

So during the pandemic, we all spend our personal and professional lives staring at a screen, right? And so we had this amazing boom in the book business, about almost 20% -- 15% to 20% increase in spending during the heights of the pandemic. And it lasted for about 2 years. People went to print because they want to disconnect from their personal and professional lives. And so we've seen the print format kind of have this a little bit of a resurgence and the e-book format has been the one that's suffered. Audiobook listeners, though, they're often doing that at a different time. I think of that as an incremental consumption of a book. And so we're still getting growth in digital, but the strength of the print book has been surprising. And not only that, but this holiday period, one of the most amazing trends that I've been in publishing for a long time now is that we're seeing young people going and by Deluxe additions of hardcover books of backlist books that they love. So a lot of these romantasy books, we published Bridgerton. There are these beautiful $30 books. They look like beautiful bibles. They're at the front of stores everywhere. And even though young women have read them either in e-book or in paper back before, they're giftable, they're absolutely gorgeous. And this is a trend we see. We have wicked -- we have the books by Jerry MaGuire -- not Jerry MaGuire, Gregory MaGuire, sorry. And those books are out in the books right now with these beautifully designed books for $30 and they're selling like crazy. So this trend of having backlist books up priced into beautifully designed books is something that's new and retailers are wholly supporting it, and that's been driving the overall business and our business at HarperCollins.

Got you. And just focusing on the digital side, it sounds like the audiobooks is growing, it's bigger and it's growing and offsetting the declines you're seeing in the e-books at this point.

That's correct. Yes. So our overall mix is still growing in digital, but it's not at the expense of the print books. We're getting growth in print, and we're getting a little bit more growth on digital, but the decline is coming from e-books. So that, that audiobook, as you said, the audiobook growth is offsetting the declines in e-book.

So maybe back to the Spotify relationship. How do the economics of this Spotify partnership work?

Well, it's -- all of our deals with our distributors are on a wholesale model. So we get paid like on a consumption basis on a per listen sort of model. And I mean, I can't go into much more detail than that. It's just that, that wholesale model works very well for authors and for publishers. And it's -- I'd just like to point out, it's different than the music business where that was a subscription pool. And so that music model is kind of as a pooled model or a certain percentage of the subscription goes to a pool and then that's paid out to the artists. That's not how it works...

It's a lot more direct.

It's much more direct. We know exactly, like I can tell an author, this is exactly what your royalties will be for every listen on Spotify or on audible. So that model has worked really well for us and Spotify and some other audiobook distributors have found really good ways to work in that model. And I think it's very -- it's accretive for our authors in that regard.

Got it. Now I'm a Spotify user, but I don't [indiscernible] on our team cover Spotify, but I believe as a Spotify sort of family customers, we get 1 book -- effectively 1 book a month, I believe, because my wife listens to audiobooks. is that -- so that sort of caps to a certain extent, what you guys are going to get paid from Spotify...

No. Yes, let me tell you, so our deal with Spotify is 1 relationship, and it's not wholesale consumption model I was talking to you about. Obviously, the relationship between Spotify and their consumer is a different relationship, right? And so they have to manage their economics between those 2, and it's up to them to decide how to do it. But their offer, I also have a family of 4 kids. So I'm the credit card holder on the Spotify. My oldest daughter convinced me to do that deal a long time ago. I'm still paying for it. But the way it works right now with Spotify, and this is important to note because I do think there's a lot more growth potential for us through Spotify. As a family plan right now, you can have 6 accounts, but only the credit card holder can listen to the audio. So maybe if your wife is listening, she's probably the credit card holder. That's a technical issue. And right now, I think, it's 15 hours a month. And then if -- you can listen to that for no extra cost, your wife can listen to that for no extra cost. That's basically a book. So you're right about that. But if she wants to listen to a second book, she can just top up and you can keep listening. So it's not capped in any way, but you do begin to pay above plan if you go beyond those 15 hours. So we don't see any cap. But more importantly, the technical limitation around only having 1 credit card holder, Spotify is working on that. I don't know when it will change, but we've been told it will change, and that's going to open up a lot more potential audiobook listeners. So you'll be able to listen...

Yes, you would think that, that would create some -- especially given how many subscribers they have, I mean, that would open up, any sense on the timing of that?

I don't know the timing of that. It's not a -- basically, my understanding it's a technical issue that they're working on. So that gives us some real hope. I think, that we'll see another sort of step-level improvement in our business with Spotify. And then also Spotify continues to roll out internationally around the world, their audiobook program. And so those are 2 very encouraging developments that I expect to come in the near future that will help us drive that growth that we're seeing at Spotify.

Now that Spotify has been in the audiobook industry for over a year. Have you seen any differences in the audible offering or additional promos? Or how are they -- what are they doing in...

Yes, they have -- grow. We've seen growth from them. They have gotten more aggressive on promotions for their customers. We've also seen, I think, at the end of November, audible is now has an offer that goes to Amazon music consumers. They're paying subscribers. So they, like Spotify, was able to get an audiobook offer out at very low cost, low risk to their music and podcast listeners. Audible is now doing the same thing through Amazon. So those are examples of kind of more offers for consumers, more promotion for our books. And I think that's been part of what's led to the continued growth at audible.

Are there any other potential entrants into the audiobook market? Apple, Google, any of these other guys that may...

Yes, they're in the business. They have not been -- Apple is -- tends not to be an aggressive retailer. They kind of set their terms, they set their offer, and then that's kind of it. So I would love to see Apple get a little bit more focused on that. And Google is kind of similar. They just seem to have bigger fish to fry. And so at the moment, there is another -- there are a couple of other regional players, particularly in Europe and in the Nordics, there's Storytel is a big audiobook player. So I'm hopeful there'll be some others. But at the moment, it's really Spotify and Audible, sharpening their consumer offers and expanding internationally that I think is going to drive most of our growth in the near term.

And if you -- and again, I'm not as familiar with the book publishing business, but it sounds like you have 3 categories. The sort of paper -- sort of traditional books, audiobooks and e-books. Over the next 5 or maybe 10 years, how does that evolve over time? I mean do we think audiobooks continues to take market share? It sounds like, again, paper books are growing again. What is the sort of long-term sort of state of the book publishing industry? What does that do to your economics?

So we're agnostic on the format. We work hard, though, to make sure that the economics work for us. So we wouldn't be agnostic if there was a huge difference one way or another. And that's been decades in the making to ensure that our pricing and margins are adequate in these different formats. We really just want to have our content in front of the consumer so that they can choose whatever format they would like it to be in. And then we know there's different kinds of consumers that are out there. There are some consumers who are priced inelastic, and they just want high-quality and beautiful books to hold and to share and to gift, and there's others that are very elastic. So really, we try to work at pricing, promotion, various formats so that we can find those potential readers wherever they may be, whether they're online or whether they're going into bookstores. So we do a lot more trying to make sure we're reaching those consumers. So the more formats, the better. We've tried to develop other formats in the past. They -- some of them haven't worked. There was -- at the early days of the App Store, and there were a lot of books that were being packaged as like enhanced books available for sale in the app stores, just didn't quite catch on. There are -- with AI, there are -- there's all these ideas of kind of talking books where you can have a book sitting on top of a large language model and you could converse with an author. We're playing with those types of products. They're kind of interesting. I don't know how you market or price or sell them, but we're experimenting. It's fascinating. So there will be other formats in the future, but I can't tell you right now that they're going to move the needle on our overall economics.

Makes sense. For the past few quarters, you've seen some nice margin expansion what's driving this? And is there room for that to continue?

Yes. We're very happy with the momentum after we had an unbelievable run during the pandemic, where I mentioned consumer spending on books went up 15%, 20%, and then we had a little bit of a bubble burst. And as a book publisher, we really finance the entire creative supply chain. So when that bubble burst, it took us about a year to get through it, and we had -- definitely had margin contraction. We've been working really hard, particularly over the last 12, 18 months to kind of bring everything back in line and get back to equilibrium. That's our own costs as well as pricing. And the teams really managed to do a good job to get that margin expansion and kind of get back to where we were before. As our business continues to grow digitally, we do see margin expansion. And when our business -- when the mix of product shifts from new books are more expensive because of all the investment in editing and the risk we take and yet when it shifts to backlist like with Wicked or with J.D. Vance, we'll see our margins will rise. So there's always going to be a little bit of ebb and flow, but as a team, what we try to do is to make sure that our cost structure is appropriate so that we get these very solid margins, and we're getting back to that level right now. And I feel good about the momentum we're seeing on the top line, and we're expecting kind of similar results.

Got it. You mentioned AI and you're talking about new book formats. How do you think -- I mean, obviously, very early days, but how can AI transform your business and maybe the book publishing business in general?

Yes. It's absolutely fascinating what AI is -- seems to have the potential to do. So there are risks and opportunities. Our business -- we're an IP business in its heart, and it's founded on copyright. And so there are all these debates right now about all the content that was illegally used to create these large language models. So that's one of the risks, I think, that we have, and we're trying to do deals. We've done -- we've announced one, maybe there will be others, and there could be lawsuits. So there are some risks. There's also risks around generative AI. There could be an explosion of low-quality content. I think our high-quality content will we'll win. It's always one in the past. There's been explosions of self-published content before. And there was -- there were narratives out there like, oh, you don't need a publisher anymore. Well, that's been proven not to be true. And I think the same will be true of generative AI, but it's still a risk that we're managing. But there's also the tremendous opportunities just within our business, so many of our activities in marketing and selling in editing, some of the tools that we've been able to deploy within the company show tremendous productivity improvements. And so we've got dozens of initiatives in a lot of different departments to try to realize those productivity improvements going forward, and they're going very well. And then on the revenue side, areas such as translation from English to other languages or from other languages into English show real promise, both from a time and cost perspective. So -- and then also taking books from -- when we have the text of a book, you can now create a very high-quality audio, again, very, very fast. So we will -- we still will use -- for our majority of our books, we'll still use real voice actors for the audiobook recording, but there are segments of our catalog where it was not economic for us to make that kind of investment. And now with AI tools, we can make audiobooks available, particularly for like smaller markets where we couldn't justify a big expense to have a professionally recorded audiobook. So I would see new revenue opportunities coming from translation and from kind of text-to-speech digital narratives that are going to open up new revenues for us as we go forward. So those things, I think, are very exciting. And then there are potentially licensing deals or new types of products like you can already today, the technology is there, if you wanted to do an AI cooking site based on cook books, would not be difficult to do. Again, the challenge is how do you monetize? How do you bring traffic to it. But the technology enables those sorts of focused niches to be developed on the back of book content. And we have incredibly large catalog of books. So there's rights issues, there's technology issues and all kinds of issues. But when we look at the capabilities of these large language models and we can already see and we're starting to pilot some different products to really think through about how would you enter a market or try to begin a market as we go forward.

I mean it just seems like -- I mean, have you guys -- it seems like there's a huge opportunity to better monetize your library. As you were saying, through audiobooks in every language and every book, like you said, maybe even eventually video content created from cook books and other, how 2 books and maybe even nonfiction books, I mean just given how we're having a segment later today on AI and content creation. Have you guys sized at all or attempted to size the potential revenue opportunity from better monetizing the library? Do you guys call it a library? Is it...

We use both terms. Yes, we have -- I mean, it's fun to size those things. They can be quite big. But I don't want to -- but I can't say that they're like -- they're here medium term. There's a lot of things have to happen to build markets. The technology to us seems to have come into existence overnight. We know that's not really the case. There were years spent building it. But there are now tools where you can -- I mean, yes, you can imagine taking a manuscript pouring it in and having a movie script or television script come out and then using Sarah to like storyboard. I mean, yes, those sorts of -- it's not too many leaps of the imagination to see that. Now that's very simplistic...

Right, there's licensing. There's a lot of other issues...

And there's a whole other level of quality and all kinds of issues. But in terms of -- again, maybe speed to market or getting concepts, clear concepts to the professionals in film and television like that, that's kind of -- that's easier to do now. So there are these really big opportunities, I feel like that are out there, but it's very, very early days, and it's hard to draw a link back to next year, next quarter, but it's happening, and we're spending a lot of time trying to figure that out.

Got you. And you mentioned that you did -- you have signed one AI licensing deal. Can you talk about that? And are there -- a lot of these deals out there?

I can't really say much about it because of an NDA. It's an early -- it's a fascinating time, but there's -- these companies, everybody wants to keep their deals close to the vest, which I respect. And we are -- we have heard from other companies, there's been some conversations, but I really don't know. I mean this is -- it's so new. I can't tell, just because you're talking doesn't mean you're going to have a deal, but talking is good. These are early days.

And we covered Paramount, and we saw the KKR purchase of Simon & Schuster. Just any thoughts on transaction. That actually had ran into some -- obviously some regulatory issues, new administration, what's your view on the sort of M&A landscape in publishing?

Yes. We remain very active in M&A. It has to be a good fit for us. We have a track record of trying to pay a disciplined price, and then we're very good at folding them in and realizing cost synergies. But it has to be a good fit for us. We recently bought a very good German publisher, and that's the most recent deal. There's a few others that we're looking at, but they're more on the bite-size folding, nothing at the scale of Simon & Schuster. It remains a terrific asset, very well run, terrific library books. And if it were to -- if it comes on the market at some point, we would always take a look...

Do you guys look at Simon & Schuster...

Yes, I think 3 times I looked at it.

3 times is too much. Okay. Got you. A couple of wrap-up questions here. What do you think are the biggest threats to your business or the things investors should worry about?

Well, I think it's just with all businesses right now, it's the geopolitical situation, changing administrations, potential of tariffs. We've done a lot of work over the last 5 years to really try to minimize the risk of tariffs, but there's still risks. Certain types of books are printed economically in the Far East, children's books and some bibles, but we've dramatically reduced our exposure there, but it still remains a little bit. So...

Where are most of your book published or actually printed?

Most of them -- almost all of our kind of just black and white novels history are done in North America. But when it comes to specialized printing like Bibles, there's a really good cost quality equation in China. And so we've found other partners. We've really diversified our manufacturing supply chain over the last 5 years, but it still remains -- paper is sourced outside. A lot of comes from Canada. I mean there's -- so there's the uncertainty around tariffs. There's -- every -- when wars break out, there's all kinds of issues. We've had supply chains disrupted, even when tankers get caught in the Red Sea, that caused a headache...

Yes, a lot of books...

The strikes, the port strikes were a real threat going into this holiday period. I mean, I'm very, very happy because we had books on boats that would not have come out. And they're designed to come out for this period. We're not going to sell them in January, February. So those are the sorts of macro geopolitical risks that I'm mostly concerned about? And then in AI, I say it's a little bit of a risk, but I still see far more opportunity than risk to our business. So anyway, that's how I think about it.

What about the stronger dollar if we -- looking ahead, is that -- I mean, given your revenue mix, and it sounds like some of your -- most of your costs actually, I guess, would be in U.S. dollars, right, just given like licensing and it sounds like you put most of your books in North America. I mean is the stronger dollar good guy or bad guy for you?

Yes. It has an impact, but it's not a major -- like a lot of our deals are all done in U.S. dollars. So it can have an impact, but it's not something that really keeps me up at night.

Got you. Okay. And then just lastly, you guys are part of News Corp, a lot of different pieces to the puzzle there. What are the sort of benefits you see as being part of that organization?

Look, scale is really important in business today. I mean if we were talking about Spotify, Amazon and Apple, I mean these AI companies, I mean, they are the Magnificent 7, what are there so many different names. They are big, global, well-capitalized companies. And so we deal with all at HarperCollins. We're dealing with all of them. And so it's helpful to be part of a larger media company. And I've been in this job for a long time now, and I've seen that play out time and time again. So I'm happy where we are and the support we've had from News Corporation over my many years here has been terrific, and they're continuing to support us either through M&A and certainly in all of our organic initiatives. So I think we're in a good spot.

Sounds good. Let's leave it there, Brian. Thanks for joining.

Thank you.