News Corporation (NWSA) Earnings Call Transcript & Summary

I can see a few people still coming in the door. So while people are settling into their positions, why don't I just start by reminding everybody the disclaimers for this session today, look at the website www.morganstanley.com or check-in with your Morgan Stanley representative. With that out the way and the door closed. Welcome, everybody, to the session this afternoon with News Corporation. My name is Andrew MacLeod from Morgan Stanley's TMT team in Australia. I'm fortunate to be joined up on stage here with my colleague, Sean Diffley, specialist sales from Morgan Stanley in TMT from New York. And of course, our guest of honor, Mr. Robert Thomson, CEO of News Corporation. Thank you for your time today, Robert.I thought I'd kick things off a picture question, a question on strategy. It's been a busy couple of years, Robert. I've covered the stock for about 10 years as a listed company. I think in the last 2 years, whereas I checked earlier, your share price is up about 70%. It's been a busy period of restructuring, shedding some businesses, adding capital to some new businesses and delivering some earnings growth in a couple of your key divisions. So I'm interested in your reflection though of, a, how far you are in the progress of what you set out to do a couple of years ago. And I'm also fascinated to know where you're spending your time at the moment. What parts of the business are you thinking longest and hardest about as to maybe where you can unlock some further value in the future?

Is that before or after tariffs?

I think we'll have to think about it on an after tariffs basis?

Our stock price was up 80% before the Trump announcement. But it's -- well, clearly, every company is on a journey. And we've been on a journey more dramatic than most in the sense that when we were spun off now 12 years ago, we are very heavily print-focused. Clearly, we had some challenging segments that we needed to address. We've had News America Marketing. We had to amplify the digital education company, which was great company, but a prolific loss maker. And if you look from there to now, we've lost, say, in print revenues are probably up to this day, something like $3.5 billion, $3.6 billion print revenues that have gone away simply because of inevitable digital transition. And so at the same time, even currency movements have taken off a significant amount of dollar revenue given the international caricature of the company. So bearing that in mind, we've been in the last year or so reporting record quarters for the company. The Q2 numbers were very healthy as well. And yet, we're still far from happy and no journey ends per se. But we are somewhat pleased with the way the character of the company has changed, the way the revenues are much more sustainable. We're a more predictable company in some ways and I think those of you who follow us closely will have seen that. Well, back a few years ago, a decade ago were about 20% to 21% of our revenues were digital, we're now a majority digital company. And you can see with the imminent sale of Foxtel, it's been agreed. We're just waiting on 1 Australian regulator's approval, which should come this fiscal that was a large chunk of the company in many respects, but we decided -- first of all, we decided a few years ago that we needed to take control of Foxtel because at that time, it was a 50-50 venture with Telstra in Australia. 50-50 joint ventures are difficult to manage because one come -- no insult to Telstra, but for them, content was not a priority, particularly for us, content is an imperative. And so we decided, look, let's take control of it. Our team there led by [ Chavonne ] and Patrick Delany have done a marvelous job in putting us in a position where a few years ago as -- as you all know, we've put some money into the company. The question to us was how much more are you going to have to put in. The question now, of course, is how much are we going to be taking out. And so we sold in principle, the company to DAZN for AUD 3.4 billion. And we will take a small stake in DAZN around 6% or so. But we will be a good partner for them, both in Australia and globally. But that clearly transforms the personality of the portfolio. It will increase our return on invested capital, obviously, enough free cash flow because that type of business demands a lot of cash and a lot of investment and DAZN are the best in the world. Its sports rights, and they're able to leverage rights across jurisdictions. And I have no doubt they'll do well with the business, but it enables us to focus on the 3 pillars that we've identified in the past, which are clearly Dow Jones is important. Digital real estate is important, books are important. So at the same time as us doing the DAZN deal, we just recently agreed to acquire 2 businesses for B2B for Dow Jones, one called Dragonfly. The other called Oxford Analytica, which provide sort of macro risk assessment for companies and fit into both the Risk and Compliance business, which is growing at about 16% annually, but also are a potential source of higher hierarchy content for Wall Street Journal readers who are interested in what's going on in the world. And it's fair to say we live in a tumultuous world. But by coincidence, I wrote for Oxford Analytica when I was a correspondent for the Financial Times in Japan in the early '90s, dare I stay on the side. And so I had a fair idea about what they do, what they can do, how we can make them better. But most importantly, how they are relevant to a professional audience in a contemporary environment. So to answer your question, we will continue to look for acquisitions, particularly in those 3 core areas. We'll continue to think very carefully about the structure of the company as the Foxtel deal attests, and we'll continue to focus on the return of capital to our investors.

Excellent. That's a good place to pick up on the simplification strategy, which a lot of investors are focused on. So just on the structure of the Foxtel DAZN transaction, maybe explain why you took equity, why they were the right partner? Clearly, as you referenced, I think the price was a bit better than most had assumed. So walk us through why that was the right deal.

Price matters. It was a good price. There was some competition for the asset. It's fair to say for those of you who follow the Australian market. And we believe in that asset, and we believe that DAZN will prosper from that asset, but particularly because it's able to approach sports rights from a global perspective because sports rights complicate a business. You have folks like Apple and Netflix and Amazon occasionally being interested. And the other thing is that having got Foxtel to a point of success, genuine success during a difficult period of digital transformation, and its conversion to a strong streaming business where you're able to multiple -- in multiple formats repurpose the same rights really is a model for the world. But we were always going to have a little bit of difficulty in the Australian IPO market, genuinely to fully monetize the asset. Whereas DAZN, not only does it have global sports rights, but because of those global sports rights, they have the opportunity, for example, and it's obviously up to the DAZN team to decide, but for example, to IPO in the U.S.

Fantastic. Another asset I'd like to spend a moment on is REA Group. It's a stock that we cover ourselves. So we've got strong and clear views on what a good asset that is, but you've owned it for a long time. And I'd like to ask the question is, what do you think -- a 2-part question here. What do you think the market perhaps underestimates about REA? I mean, the market clearly thinks it's a great asset. But I'm interested in your perspective if there are parts that perhaps aren't as fully appreciated. And secondly, where does REA sit within your portfolio of businesses now? It sounds like as per your opening comments, it's still very core, it is a great asset. But at the same time, I also read things frequently about looking for ways to maybe unlock value and change that structure. So if you can help us decipher all that a bit, Robert, that will be helpful.

Well, we're always looking for ways to unlock value regardless of which companies, whether it's REA or Dow Jones or any -- it's our job to maximize value for the shareholders. People don't fully understand REA because I don't think they fully understand the Australian property market, which is hyper liquid, there's a lot more transition there than there is here where you have existing home sales at decade lows, probably 30%, 40% below where it should be because of interest rates and the interest rate structure here, and that will change. And you'll see that when it does change, I think you'll see a significant pickup at Realtor. But number one, being the leader in a market that's that liquid, clearly a clear leader where really have 4x the visits of the nearest competitor. So you have more visitors, more visits per visitor, more pages per visit, which is actually also true of Realtor. Realtor has each visitor having more visits per month than Zillow or -- what's that other one? Homes.com, and that's not recognized. And then Realtor has more pages per visit. And that tells you about the quality of the site. And it also tells you that when people actually get around to buying a home in the U.S. or moving home, as they do in Australia -- those are, by the way, those are comScore numbers, not internal numbers. And those sites have a comparative advantage. And the other thing that's not understood about REA, is that it's a cluster of sites. And so one of the fastest-growing sites in a very competitive market and which will provide competition -- increased competition for demand is property.com.au.

It's the #3 site in Australia.

It's the #3 site in Australia. So there's competition, which is great as they must be, but I don't think people realize quite how competitive REA is and the suite of products that we have in that market.

So it's still all a core business for News Corp.

Well, it is a core business. It's an important business. It's a successful business with a great team. Owen has done an excellent job along with his executive leadership group in continuing to build the business, investing in intelligent adjacencies. Again, that's another thing that I don't think fully understood how they're using those leads, those valuable qualitative leads, for example, to drive customers into informed home finance.

Yes. I think they're a world leader in what they're doing in terms of real estate portals around the world. Robert, I'd love to get your perspective as well at other company you referred to a moment ago, well, look at the CoStar Group, when with CoStar making a bid for the #2 player in Australia, the primary competitor for REA. The initial reaction of the Australian market was to sell off REA shares as -- it's a lot on the concept of a large competitor coming into the market. But of course, you've had experience in watching CoStar in the U.S. and in the U.K. I'd love to hear your perspectives on how you think that changes and how the market should be thinking about the valuation of REA in the context of CoStar maybe arriving in Australia. What are the lessons you've observed so far in the U.S. experience?

Well, lesson learned, each of those 3 markets is fundamentally different. From the financing of housing, the number of transactions per 1,000 people, just the culture of the buyer/agent relationship, the structure of the revenue model. So for example, in Australia, most of the revenue for REA comes from the sell side. In the U.S., most of the revenue for Realtor and for the other digital probably comes from the buy side. Now Damian who's running Realtor is developing a sell-side product that's relative to the total, not yet in the majority, but it was up over 40% in Q2 year-on-year. So understanding that these are very different markets. And secondly, understanding that they are competitive. And we're obviously, by nature, a competitive company. But we have the comparative advantage in these competitive markets of having media properties. And in a world when search is fundamentally changing because of AI -- I mean, we all know that. Any time you do a Google search, you see the impact of AI in the search. Your ability to create a network effect with your own sites, so be able to drive traffic to realtor.com from MarketWatch, to be able to drive traffic to REA in Australia from news.com.au. That's a huge advantage. And it also, I think one of the reasons why Realtor is such a sticky site is that we've spent a lot of time and a fair amount of investment, so really is building up the Realtor news and analysis session which fits into, for example, something like the Mansion section at Wall Street. So not only in a commercial sense, but in an editorial sense, you're able to move traffic around your site. And that's -- Andy is a great competitor himself, but that's not something he's able to do. And so you can certainly spend a lot of money on marketing, but what we can do really without spending money is networking.

We wanted to get your broader perspective on the macro and economy broadly, you see a bunch of different markets. You reference high interest rates in the U.S. impacting the real estate market here. But what's your take, obviously, postelection, a lot is changing. You referenced tariffs earlier. Any interesting kind of thoughts that you have from your vantage point on the state of the global economy? Any trends that you're seeing in the business more recently? Anything you'd call out there?

Yes. Look, particularly here in the U.S., we are in an interesting phase. So we have the second edition of the Trump presidency. It's very different to the first during the first Trump presidency. The President really didn't know who he should put in his cabinet. This time, he knows very much who he wanted in his cabinet because he has more experience. But if you can extrapolate the turmoil -- set of tariff turmoil, but a certain amount of uncertainty and believe that, that will be a perpetual -- well Chairman Mao used to call it permanent revolution, right? That this is not a permanent revolution. If you were going in and wanting to disrupt, you would do it at the front end. And then hopefully, and obviously the goal is to change the terms of trade, to reduce the federal bureaucracy spend, et cetera, et cetera, which is why DOGE essentially has a limited time live. But we're in the midst of the early Trump 2 turmoil. And then the optimistic interpretation is that it's purposeful turbulence because there's no doubt the President is focused on the stock market, which, as we all know, didn't react to well today. There is no doubt the President is focused on inflation. And so those 2 things of themselves provide a natural discipline. But there's also no doubt that in the end, he wants to be seen as a successful president. And a successful president presiding over 4 years of chaos is not the successful president. So I would try to contextualize the upheaval in which we find ourselves. I'm of -- I guess of the more optimistic school, could be proved wrong, but that this is -- these are transactional tariffs, and there's a certain purpose, there's a certain method to the madness. And if that's the case, then in 6 to 9 months' time, I think we'll walk for our businesses, for any business residing in the states for any global company contemplating investment, the scenario will be somewhat different.

It's a good segue to Dow Jones, which obviously would benefit from all the news. And news flow that we're trying to digest and understand on the call, you spoke about an acceleration in the back half of the year. Maybe walk us through what you're seeing across Dow Jones, obviously, Wall Street Journal has had good trends. You've talked about subscribers and pricing tailwinds, maybe just walk us through what the biggest drivers are there.

Yes. That's the B2B business, obviously doing very well, the acquisition of OPIS and CMA. They've been growing mid-teens year-on-year, quarter after quarter. There's no reason why that shouldn't continue to be the case. We've had some issues with Factiva and a Factiva contract, which brings down the overall growth in the B2B business, but that's, one, something that will be resolved, and two, something that we're lapping. So the B2B business is doing particularly well, again, which is why we made those 2 recent acquisitions. The Consumer business, as you say, we are starting to see an increase in ARPU as was planned by the team. They expect that the second half will be auspicious in that regard. Essentially, we're getting much better at dynamic pricing. And there's no doubt that, for example, Gen AI will help with that, both in identifying cohorts and elasticity and identifying price points at which the obvious value of a subscription is meaningful to our subscriber, i.e. bring down the churn rate. Because different subscribers derive different benefits, say, from the Wall Street Journal. They read different sections. And the woman or man who reads the second section, the business section, is obviously compared to somebody who's reading mostly general news isn't likely to be a higher-value subscriber and may well then subscribe to Barron's. It may -- right through to say, Oxford Analytica. And that upselling potential, which has always been inherent in the Dow Jones portfolio is something that the team will be working on particularly hard over the coming months and quarters.

Can I ask a couple of questions on the books division, which I think has been a fascinating evolution of that -- the change in revenues and earnings mix of that business. I really think it's an interesting case study of a traditional media business becoming more digital. But could you spend a moment, Robert, talking about where we are on that journey? How important some of the deals like Spotify have been for the books division? And to date, well, more recently, the growth has been organic, but historically, you've got a good track record of buying some other books' assets, folding them in, doing an excellent job of cost out as well. I wonder, are there still any opportunities on that front as well in the world? Do you still see opportunities for further industry consolidation in books perhaps?

Look, there are definitely opportunities. And I think you're quite right. Brian Murray and the team there have been excellent at consolidating acquisitions. And in a way, HarperCollins, who would have imagined over 1.5 decades ago, the print book business would be thriving in the way that it is. But I think we all felt that inherent potential. And it's emblematic really, of the News Corp story in that we've been both driving revenues overall and driving margins. So the margin last quarter for HarperCollins was 17% compared to 15.5% the same quarter a year ago. For the overall company it was 21.4% compared to 18.7%. So you can sort of see this similar. So we are driving both revenue growth and margin growth. We have our 3 key pillars, and they are our 2 key pylons. And part of it is so fascinating when you look at how that business has evolved because when I became CEO, 12 years ago, it was interesting that the e-books were taking off and there was a genuine -- I knew nothing about books. I still know very little. But there was a real confidence in the book publishing industry that e-books would work its way up to being almost the majority of all books sold. And it peaked at around 24%, 25% and then abated. It ebbed and it went as low as around 11%, 12%. There's been a little flick up again in e-books. And then audio books have come from almost out of nowhere to -- as a percent of digital now to be a larger share than e-books. And those who follow the company know that quarter after quarter, year-on-year, we were seeing 25%, 30% growth in audio books in the last couple of years. Then we did the original deal with Spotify. I think we are their most important partner in the book industry. Meanwhile, Audible because of the Spotify competition has become more active, more inventive. And so in the most recent quarter, audio book sales were up 13%, and that's even with the lapping that's been going on. I said they were tough comparables. And something fundamentally different has happened to reading, listening habits. And it's linked into the growth of the iPhone, people learning how to stream, podcasts. And so I'm fairly confident that we're still at the front end of the audio book experience. And there's so much more that you can do with them, your ability, for example, to use AI to translate. And that's one of the areas that I think not necessarily understood about the value of our content set, where you know the auto transaction is getting in that sort of 95% accuracy range, your ability to do audio to text, text to audio, text to visual. If your core content is of a high quality, the potential permutations to profit from it at low cost, they're almost endless. It's really -- we will be limited by our imagination, our creativity and our marketing ability.

Yes, I think it's fantastic asset that the market hasn't necessarily fully recognized. [ Sean ]

I wanted to ask next about your relationship with big tech, which has evolved over time and tie into that AI. Obviously, big theme throughout the conference. You have a partnership with OpenAI, you have a lawsuit with Perplexity. Maybe walk through what we should be thinking about as it relates to News Corp on your big tech relationships, monetizing AI, but also going after those who are not appropriately compensating you?

Well, I think we should call Perplexity by its full name, which is to perplexing Perplexity, right. Yes. So we're in the midst of litigation with them. And look, those of you who've attended this conference in the past, we have a dual strategy, wooing or seeing. And we wooed OpenAI and Sam was, Sam Altman in particular, is very focused on quality content, the freshness of the immediacy of content and that partnership is really blossoming. And because it's more than a transaction, a significant transaction, though it is for us. And you can see the impact in News Media section. You can see an impact at Dow Jones if you do the math. The numbers are not public, but if you do the math, you'll be able to get a reasonable idea of the scale of it. But it's also us assisting Sam's team in understanding how you display content, the importance of links, provenance -- because they're finding that actually their search users want to go back to original sources. And that reinforces the value and the provenance of content. And for us, we're getting access to great information about the evolving use cases in the AI age, so that our editors understand when people access content, what they're looking for, why they're looking for it, what's the right length of content for this or that subject. And having that insight at this time of sort of exponential evolution is really important. More broadly, with big digital, we have great partnership with Tim and the team at Apple. We were the cornerstone partner of Apple News+. We have an agreement with Google. Obviously, in the AI age there will be negotiations about AI and Google and us, but that's to be expected. Then with Meta, it's a complex relationship there, varies country by country. At a personal level, Mark and I get on well. At a professional level, there's some work to do. I'm not going to volunteer to fight him in a cage match. And then whether it's Microsoft, whether it's Amazon, these are evolving relationships. But what I am reassured by is the level of expertise our team has built up over the past decade in negotiating, in haggling, in defining, really leading the world in fashioning a clearer understanding about the value of content, the value of provenance, the value of IP in the digital age. And that team is still working on each of the contracts with each of these companies. And I think that does give us an advantage.

Robert, I'll ask a question on the U.K. and Australian newspapers. It's a smaller part of your portfolio now, however you measure it in terms of profitability or valuation. But I know I still get questions from investors sometimes who worry about those businesses potentially becoming a big drain on profitability. I'm interested in how you see their evolution. To me, it looks like the cost structures been variabilized as well as reduced. So I'm interested in how you see the outlook for earnings from those businesses. Is there still scope to take further cost out? Do you think we'll get a rebound in revenue at some point? And probably overlaying all that, do you think there's scope for industry consolidation in Australia and the U.K.? And could you find yourself a buyer or a seller of those assets?

Well, the team has done quite well on the cost front. If you looked at the margin for the News Media business last quarter compared to a year ago, it rose from 9.8% to 13% in a tough advertising environment. That includes the New York Post, which is frankly doing particularly well. It's increased advertising both in print and digitally and will be the -- I suspect an interesting beneficiary of a trend we haven't talked about, which is there is a course correction culturally, which will have an impact commercially in America. And if you look back at some of the ad agency associations like [ GAM ], which were essentially putting publications like the New York Post on prohibited lists, that is clearly going to stop. There are investigations going in Washington at the moment into the nature of that bias, basically. And so clever companies who, in the past, were influenced by sort of ultra liberal ad agency associations and frankly, ultra liberal ad agency executives, will be starting to ask what is the best venue in this era to have my voice heard on issues that matter. I suspect quite a few of our properties globally will be a beneficiary of that. So that's a commercial -- that's a cultural trend with commercial consequences. With Australia and the U.K., the teams are constantly innovating. And you see it with the increase in digital circulation revenue in Australia, you see with the most recent experiment, the introduction in the U.K. of a Sun Club membership, so starting to generate more revenue in more ways from what are still very, very large audiences, news.com.au has been generally the largest news site in Australia. And where we're different to a lot of other publishers is we just have scale and that network effect, which is a comparative advantage. And -- but I think it's really, frankly, back to Rupert and Lachlan, we have a culture that is incessantly innovating because the company, however well it's doing, believes that complacency is a sin. And that's true of Rebecca and her team and Michael Miller and his team.

All right. And we want to close out with a question going back to corporate simplification, which you obviously have been on a journey, you referenced. We had Lachlan here earlier today from Fox. How far along are we in the journey? You referenced we're about 12 years from the split. Investors have asked does it ever make sense to recombine. Obviously, the media industry is in a lot of turmoil. How far along are we in this process? How should investors think about the path forward from here from a corporate simplification standpoint?

We are incessantly introspective and as we should be institutionally. And it's fair to say that the Foxtel sale is evidence of that, that at the right moment came the right offer, essentially the right partner. And we were prepared to sell a company that we literally had taken majority ownership of only a few years earlier. But it certainly simplifies our portfolio. But I should say that, that deal is not the end of us being thoughtful about simplification because we're conscious of the difference between the share price and the actual asset value of News Corporation, given the quality of the assets. And we are always thinking about, okay, what's the right thing, the right time, the right structure because it's incumbent on us to do that given the responsibility we have to investors.

Fantastic. Well, look, we're out of time, Robert. It's always a journey talking about all the different divisions of News Corporation. Thank you for your insights. I hope everybody found that interesting. Thank you for your time.

Thank you. Thank you.