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spk08: Good day and welcome to the News Corp. Second Quarter Fiscal 2019 Conference Call. Today's conference is being recorded. Media will be on a listen-only basis. At this time, I'd like to turn the conference over to Mr. Michael Florin, Senior Vice President and Head of Investor Relations. You may begin, sir.
spk06: Thank you very much, Aaron. Hello, everyone, and welcome to News Corp.'s Fiscal Second Quarter 2019 earnings call. We issued our earnings press release about an hour ago and now posted it on our website at newscorp.com. On the call today are Robert Thompson, Chief Executive and Susan Pannuccio, Chief Financial Officer. We've all been with some prepared remarks and we'll be happy to take questions from the investment community. This call may include certain forward-looking information with respect to News Corp's business and strategy. Actual results could differ materially from what is said. News Corp's Form 10-K and Form 10-Q filings identify risks and uncertainties that could cause actual results to differ and contain cautionary statements regarding forward-looking information. Additionally, this call will include certain non-GAAP financial measurements such as total segment EBITDA, adjusted segment EBITDA and adjusted EPS. The definitions and gap to non-GAAP reconciliations of such measures can be found in our earnings release. With that, I'll pass it over to Robert Thompson for some opening comments. Thanks, Mike.
spk07: News Corp. reported increased profitability and revenue growth during the first half of fiscal 2019, highlighting the power of premium content and authenticated audiences in a fact-challenged world that craves credibility. For the second quarter, the company saw 21% revenue growth and a 13% rise in total segment EBITDA, reflecting the consolidation of Foxtel and a healthy expansion of revenues at HarperCollins, Dow Jones and REO Group. More generally, at News and Information Services, we saw a continuation of positive trends in paid digital subscriptions and digital advertising in Australia and the US, where growth mitigated declines in print revenue. Even though our teams have been diligent in pursuing revenue opportunities, the digital world remains somewhat dysfunctional and subject to intensifying scrutiny. We are in a world of exponential e-evolution, in which dominant players have the potential to manipulate markets for data, products, advertising, news and ideas. There is no doubt that some of these companies are arbitraging algorithmic ambiguity and hoping that regulators do not fully appreciate or define their dominance in certain sectors. When one company controls much of the US consumer audio book market and has its own products in that market and can tweak its algorithm at will, the potential for abuse is almost limitless. It is clear that there has been a regulatory awakening and the time has come for a regulatory reckoning. Turning now to our own businesses, which are certainly conscious of their responsibilities as custodians of customer data, it is clear that the ongoing digital transformation of Dow Jones is efficacious. Many traditional media companies are ailing, but that is certainly not the case at the Wall Street Journal, where paid digital subscribers grew 23% to over 1.7 million. Dow Jones overall has approximately 3.2 million total subscribers, 13% higher year over year. Elsewhere in the Dow Jones family, MarketWatch saw strong gains this quarter, with visits up 45% year over year according to Adobe Analytics, while Barron's grew its total subscribers 27% year over year. The professional information business at Dow Jones also continues to show progress, with risk and compliance reporting a 26% increase in revenues. There has now been in excess of 25% year over year revenue growth for seven consecutive quarters. At the Times in the UK, print advertising revenues rose for the fifth consecutive quarter. The Times and Sunday Times saw solid growth in digital subscribers, while the Sun continues as the UK's number one news brand across print and digital combined, according to the latest PAMCO survey. Last month, we made an application to the UK government to allow sensible sharing of resources and cost reduction across the Times and the Sunday Times. The editorial independence and uniqueness of these peerless publications will be protected, but there are clearly areas of cost duplication, and we want to ensure the very best use of our financial and of our journalistic resources. Chris Evans, the gifted legendary radio broadcaster, joined Wireless Scripts Virgin Radio last month, and the audience growth has been remarkable. To put the impact and the potential in perspective, during the first day of Chris's show, Virgin Radio saw more app downloads for digital listening than in all of 2018. The Breakfast Program also deployed a unique sponsorship partnership with Sky, so that the flow was not disrupted by conventional ad breaks. That model has already proven its worth and is likely to be replicated elsewhere on the radio roster. At News Australia, profitability improved thanks to continued digital advertising growth and cost efficiencies. .com.au was again the number one news website, significantly ahead of its competitors, reaching almost 10 million unique users in the month of December, according to Nielsen. Meanwhile, The Australian, where digital page subscriptions account for more than half of the total subscriber base, we saw strong digital subscription growth this quarter, up 23% -over-year. Since we brought together Foxtel and Fox Sports Australia, we have made extensive changes in management, enhanced the sports and entertainment portfolio, and upgraded the technology. Average audiences across Fox Sports Australia channels are up over 70% -over-year, with the addition of live cricket-boosting viewership during the summer, traditionally a relatively quiet period for customer acquisition. Our new sports streaming product, KO, has certainly changed the traditional trend. As of February 5th, KO had attracted over 115,000 users, of which approximately 100,000 were paid. We expect that number to increase markedly as we head into the peak selling season for the more popular winter sports, Australian football and rugby league. It is clear in a competitive world of content that the passion for sport drives subscription growth, and Foxtel has by far the best collection of that cherished content. In our digital real estate services segment, the REA Group in Australia continues to outperform the competition, posting robust results despite a challenging listings environment, driven by strong residential growth and the inclusion of the data services business, which was not in the prior comparative period. The continued success of REA would not have been possible without the leadership of Tracy Fellows. She will be driving global expansion and seeking new opportunities for our fastest revenue growing segment in her new role as president of global digital real estate at Newscore. Since the creation of the new Newscore in 2013, digital real estate service revenues have more than tripled and segment EBITDA has more than doubled. The appointment of Tracy underscores our increasing commitment to the sector. We are particularly pleased that Owen Wilson has become the new chief executive of REA, where he has overseen strategy, M&A and operations, all of which have thrived. Turning to US real estate, our long term optimism is undiminished, even as shorter term trading in the property market has been somewhat sluggish. As evidence of the enduring strength of our business, real estate revenues at the operator of realtor.com, Movinq, were up 23% this quarter, with total revenues up 11%. This includes OpCity, the acquisition of which we successfully closed in October. Its strategic importance is evident in the higher quality value added leads it provides for brokers about potential clients. Unlike a certain other company in the sector, we are not in the business of flipping houses or covertly competing with our clients. Our aim is to provide the best possible service to buyers, sellers and realtors. In book publishing, HarperCollins delivered another outstanding performance this quarter, bolstered by best selling titles such as Homebody by Joanna Gaines and Girl, Wash Your Face by Rachel Hollis, both of whom are set to publish new titles in the current quarter. And in the UK, also very successful was the Ice Monster by the irrepressible David Walliams. Digital sales also grew 12% in the prior year, driven by a 58% increase in the sales of audiobooks. Our results this quarter and for the first half of the fiscal year demonstrate the power of our premium products and reflect our ongoing digital transformation, which is building a muscular platform for the future and for our investors. Now Susan will provide insight of insight into the finer details of our accounts.
spk03: Thank you Robert. Turning to the financials, fiscal 2019 second quarter total revenues were over 2.6 billion, up 21% versus the prior year and total segment EBITDA was $370 million, up 13% versus the prior year. Results reflect the impact of the consolidation of Foxtel. On an adjusted basis, which excludes the impact of the Foxtel consolidation, currency fluctuations and the other items disclosed in our release, revenues increased 3% and EBITDA increased 2%. For the quarter, earnings per share were 16 cents as compared to a loss of 14 cents in the prior year, which included a charge related to the US tax reform. Adjusted earnings per share were 18 cents in the quarter versus 24 cents in the prior year. Turning now to the individual operating segments, in news and information services, revenues for the segment rose 4% versus the prior year. Currency had a $34 million negative impact accounting for more than half the decline. Within the segment, reported revenues at Dow Jones rose 4%, News UK declined 10%, News Australia declined 5%, although was relatively stable in local currency and News America marketing fell 7%. Approximately 32% of the segment's revenues were digital, up from 29% in the prior year. Moving on to the segment highlights, advertising revenues accounted for 50% of segment revenues and were down 5% versus the prior year, with approximately $18 million or 2% being due to currency fluctuations. Second quarter advertising trends across our new businesses improved modestly from the prior quarter rate. At Dow Jones, advertising revenues were flat with the prior year. Digital advertising revenues improved significantly both year over year and sequentially, offsetting print declines. The improvement was driven by strong programmatic growth resulting from audience gains at Market Watch. At News Australia, advertising declined 7%, but down just 1% in local currency, again showing moderating declines versus the prior quarter. With improvements in the rate of print declines and strong year over year gains in digital. On the digital front, we saw further expansion of .com.au, our national news portal, and News Extend, our small to medium business offering. News UK advertising fell 8% versus the prior year or down 4% in local currency, due mostly to soft print trends at the sum, which had challenging prior year comparisons. We saw modestly higher print advertising revenues at the times. Finally, at News American Marketing, advertising revenues fell 7% due to weak home delivered revenues which included FSI products and lower in-store advertising revenues which were partly impacted by the timing of product campaigns. Turning now to circulation and subscription revenues which accounted for 42% of segment revenues, we saw an increase of 1%, with foreign currency negatively impacting these revenues by $12 million or 2%. We are continuing to see very healthy digital paid subscriber growth, which has been a core strategic focus and key to improve performance. At Dow Jones, circulation revenues grew 7% benefiting from strong paid digital only subscriber growth at the Wall Street Journal, which were up 23% year over year to over 1.7 million and an increase of 125,000 subscribers from the first quarter. Digital paid subscribers accounted for 67% of total subscribers at the Wall Street Journal, up from 60% last year. In addition, we again saw healthy year over year digital subscriber growth at the Times and the Sunday Times, up 22% to 269,000 and at News Australia up 18% to over 460,000. In Australia, cover price increases and rising digital sales offset print volume declines, while circulation revenues were down modestly in the UK. Turning to segment EBITDA, News and Information Services segment EBITDA was $120 million, down 15%, mainly driven by declines in the UK from lower revenues, including the exit of SunBets and higher expenses related to newsprint prices. However, we again had increased contribution at both Dow Jones and News Australia. Turning to the subscription video services segment, revenues were $562 million versus $120 million a year ago. Segment EBITDA in the quarter was $84 million versus $33 million in the prior year. On a pro-forma basis reflecting the Foxtel transaction, segment revenues in the quarter decreased $69 million or 11% compared with the prior year, an improvement from the first quarter decrease of 17%. $39 million of the decline or 6% was due to the negative impact from foreign currency fluctuations. Broadcast trends were relatively similar to the prior quarter, with the revenue decline driven by a lower broadcast subscriber base, higher offer costs and mixed shift to lower costs. The subscription revenue decline was partially offset by an increase in Foxtel Now revenues. Broadcast APU was $78 Australian dollars, down about 3% versus the prior year, reflecting a 2% negative impact from the new revenue standard. Compared to the first quarter, the broadcast APU was up over 2%, reflecting a price increase implemented on October 1. Pro-forma segment EBITDA in the quarter decreased $71 million or 46% compared to the prior year. The -over-year decline reflects the lower revenues, higher sports programming and production costs, including approximately $26 million of costs related to Cricket Australia and about $9 million for marketing related to the commercial launch of KO Sports. This level of reinvestment was consistent with our expectations as we focus on better positioning Foxtel for future growth. On operating metrics, Foxtel's total closing subscribers were approximately $2.9 million as of December 31, up 4% against the prior year, driven by higher Foxtel Now and KO Sports subscriptions and the inclusion of commercial subscribers of Fox Sports Australia. In terms of the subscriber mix, about 2.5 million subscribers were broadcast and commercial. The remainder were Foxtel Now and KO Sports subscribers. We launched KO Sports in late November and are very pleased with the early adoption. As Robert mentioned, we had 115,000 subscribers as of February 5, of which approximately 100,000 were paid subscribers and expect to see it scale into the important winter sports selling season. Pleasingly, the KO Sports user base is engaged with average viewing time per active user currently at 69 minutes per day, with over 70% watching live video and smartphone being the primary device. In the second quarter, broadcast churn was .6% versus .5% in the prior year, which was mainly impacted by the October price rise. Churn management is a major focus for the team in Australia and we are investing to better utilise data and advanced analytics to predict churn going forward in order for the business to be much more proactive with a customized solution for retention and win back. Capital expenditures related to new Foxtel was $139 million in the first half, which would have been down modestly had we consolidated Foxtel in the prior year. At Book Publishing, we posted another very solid quarter driven by strong sales in general books with the release of Joanna Gaines' Homebody and The Next Person You Meet in Heaven by Mitch Elbon, as well as Rachel Hollis' Girl Wash Your Face in Christian Publishing. Revenues for the quarter increased 6% to $496 million and Segment Iberdar increased 13% to $88 million and both achieved record level for HarperCollins. This growth came despite recent tighter supply conditions for both paper and bookbinding across the industry. Total digital revenues for the quarter grew 12% consistent with the previous quarter and represented 17% of consumer revenues up from 16% last year. Downloadable audio again grew over 50%. At the Digital Real Estate Services segment, revenues increased 7% to $311 million, which was driven by strong organic growth and the impact of acquisitions, partially offset by currency headwinds. Acquisitions contributed $7 million to revenues, while currency had a $13 million offset. On an adjusted basis, revenues grew 10%. REA Group revenues grew 6% or 13% in local currency due to residential depth revenue growth in Australia reflecting higher penetration for premium oil and increased yield and modest contribution from the home track acquisition. We also saw an improvement in developer revenues. Revenue growth was partially offset by an overall 2% decline in new listing volume, which included a more pronounced decline in Sydney and lower media revenues. Please refer to REA's earnings release and their conference call following this call for additional details and comments on their outlook. Move revenues rose 11% to $122 million versus the prior year, helped by growth of its Connection Plus product and the inclusion of the Op City acquisition. Real estate revenues increased 23% including Op City. Revenue growth was partially offset by reduced display advertising to drive user experience and engagement similar to last quarter. We also saw moderating growth in Connection Plus lead volume, partly impacted by the transferring of leads to Op City as well as a more challenging US housing market, including declines in existing home sales in the second quarter. Average monthly unique users at realtor.com were approximately $53 million for the quarter, rising 6% versus the prior year. On Op City, we are very pleased with how the integration is going. The team at realtor is focused on leveraging their extensive industry relationships to expand adoption of the new platform. We are using advanced AI and machine learning and algorithms to better match consumers with agents. We are taking advantage of the Op City platform to monetise consumer leads that in the past have gone unsold or underutilised. Segment EBITDA rose 2% to $121 million. The quarter reflected additional costs at move related to the Op City acquisition, including deferred compensation, combined with continued reinvestment in product development and on an adjusted basis segment EBITDA grew 12%. I would now like to mention a few themes for the fiscal third quarter. At News and Information Services, we expect higher cost at Dow Jones in the third quarter to drive and execute on growth initiatives, including expansion into live events. In addition, we expect continued challenges at News America Marketing, mostly related to the FSI advertising. We will continue to seek cost efficiency to streamline the business. In subscription video services, similar to the second quarter, when comparing with the prior year, we will have additional costs related to cricket of US$25 to 30 million and incremental marketing for KO Sports of 10 to 15 million US dollars. In book publishing, overall trends remain favourable and we are encouraged by our upcoming releases together with the ongoing strong performance of our backlist. Some key titles this quarter include Girl Stop Apologising by Rachel Hollis, On the Come Up by Angie Thomas and We Are Gardeners by Joanna Gaines. At Digital Real Estate Services, similar to Q2, we expect continued reinvestment to drive revenue growth at realtor.com and in the city, including higher marketing and product development. With that, let me hand it over to the operator for Q&A.
spk08: At this time, if you would like to ask a phone question, please press the star then one on your touchtone phone. You may withdraw your question at any time by pressing the pound key. Once again, it is star then one to ask a question and we do ask that you please limit yourself to one question today. We will take our first question from Alexia Quadrani with JPMorgan. Your line is open.
spk04: Hi, this is Zilou for Alexia. Thank you for taking our question. New York Times reported another strong quarter of digital subscriber growth yesterday and from your numbers, the Wall Street Journal is also growing really nicely. Do you believe that longer term, both the Wall Street Journal and New York Times can grow at this pace and that is there room for two meaningful paid digital properties longer term?
spk07: Well, I can't speak for the New York Times. In fact, I can speak for the prime meaningful newspaper which is of course the Wall Street Journal. At Dow Jones, the subscription business is performing well and obviously has much potential for growth. If you look closely, you'll see the wsj.com circulation revenues are up 15%. That's not crosswords or couscous recipes, not the low rent afoo that we're seeing elsewhere in the sector. As for professional content, in the cluttered world, companies want to incorporate Dow Jones content in their workflow and that is happening at pace. To be honest, advertising needed work and we have a new ad team at Dow Jones and that team is certainly making a positive difference. Digital ads at Dow Jones are up 15% and as for risk and compliance, the fastest growing business at Dow Jones, if any of you out there want to minimize risk and maximize compliance then you simply must have a Dow Jones contract. If not, I fear for you when the regulator comes a knocking.
spk06: All right. Aaron, we'll take our next question please.
spk08: Certainly. The next question comes from Incho Rakowski with Credit Suisse. Your line is open.
spk05: Hi Robert. Hi Susan. My question is around subscription video services and particularly KO Sports given you've launched over the quarter. Very useful that you've provided us some stats around the subscribers. Just interested in whether you expect the sort of rate of net ads to continue over the next couple of quarters and where do you view the addressable market for this offering? Just interested in your high level thoughts there and then more broadly if we're looking at the churn rate which has stepped up, I know you've pointed to the higher pricing but do you think there's a level of cannibalization taking place as well given you've launched KO? Thank you.
spk07: Incho, KO was in the earliest innings. In cricket you would say it was in the first of four innings or in baseball the second of nine innings. What one can definitively say is we have 115,000 customers around 100,000 paying and that number has indeed been rising week after week in the two months since we've launched and indeed we are on the cusp of the peak sports selling season which is Aussie rules and rugby league as you know. It is beyond clear that sports events are crucially important in an age of confected concocted content and we have the events that matter in Australia for the next four or so years. That's an incontrovertible fact and an extraordinary asset. You can be platform agnostic but you can't be content atheistic. Of course there is more churn when you increase prices as we did late last year but what we are absolutely not seeing is massive spin down to KO from premium subscribers. The fact is that the earlier versions of the IQ box were inadequate and the current version is much more sophisticated and satisfying. The IQ 4 really does go to show that the higher the IQ the better.
spk03: I think Enjo too I'd also add, just in relation to your question on the addressable market, you know obviously our penetration has been sort of sub 30% for some years and there is a vast audience out there within Australia, the other 70% that we haven't managed to reach, that our research has been very clear are open to paying for a proposition if it's at the right price point so that would be the addressable market that we're having a look at. And just in relation to churn I did mention it in the release but the team in Australia are very focused on churn management and we are investing a lot of money in data capabilities in order to effectively manage that churn going forward and as Robert said we really have seen very little spin down as a consequence of KO but it is early days and we will continue to focus on that metric as we move forward.
spk06: Thank you Enjo. Aaron we'll take our next question please.
spk08: Certainly. Our next question comes from Kane Hannon with Goldman Sachs. Your line is now open.
spk01: Good morning Robin. Susan just visual real estate. That comment made around Tracy and then seeking new opportunities following that appointment, could you elaborate on what you meant by that comment and then I suppose just a couple of brief comments around the early traction of the OPCD model and what you're seeing on the ground following that completion?
spk07: Well Tracy has just settled into the job and it's her task obviously to increase the cooperation among our various properties around the world and that will be the first priority. Beyond that one of course can't speculate. It's interesting the US real estate market is a tad sluggish and obviously listings are down in Australia and yet digital property revenue growth remains real. You could indeed say that these are testing times and our model and investment is definitely passing that test and it shows the value of the OPCD purchase because we're providing a higher level of market intelligence and analysis and value added services in the case of OPCD and that is appreciated by our clients who know that there are both quantity leads and quality leads and quality leads mean revenue for our customers.
spk03: And I think Cain just to add on the OPCD, sort of the way that we look at this is the conversion of the leads into revenue will continually evolve as we move forward and we've bought a best in class concierge enabled company which will enable realtor to better monetise their leads by offering higher quality leads that will enable a better close rate which will provide higher revenue. It also gives us access to high quality data as a consequence of vetting the leads which we can use to branch out into other adjacencies be it mortgage, title insurance, moving etc. which is what we're currently looking at building out now. So I think the combination of those comments is what we think will drive the results with the OPCD and realtor.
spk06: Thank you Cain. Aaron we'll take our next question please.
spk08: Certainly. Our next question comes from Craig Huber with Huber Research. Your line is now open. Great thank you. I have some quick
spk09: housekeeping questions. What should we expect for CAPEX, for Fox Health for the full fiscal year and also for the entire company? And also curious if you could just tell us how the circulation revenues did with or without currency in the UK and Australia in the quarter. And my last one if I could, do you have a comment on how do you think the Australian economy is doing given all your media assets down there? Do you think it's about stable or do you think it's getting worse? Given what's gone on the chart that's why I'm asking. Thank you.
spk03: So just in relation to your first question on CAPEX, I think we've given guidance on this before. So $285 million was the number for last year, US dollars that we quoted for Fox Health and we're expecting it to be $50 million higher. We haven't changed our expectations in relation to that but obviously we continue to monitor that CAPEX as we progress through the year. I think your next question was in relation to circulation in local currency. So I think from a Dow Jones perspective circulation revenues were up 7%. From News UK circulation revenues were down 1% and News Australia circulation revenues were up 3%. There was a third part I think to your question. Yeah, I was asking
spk09: CAPEX for the whole company please and also Australian economy comments. We haven't
spk03: given that out before Craig but what I can say is we're broadly expecting it excluding subscription video services to be roughly in line with last year.
spk07: Grace, for the macroeconomics it's obviously a little difficult to tell. There are two events upcoming, a state election in New South Wales and a federal election likely to be held in May in Australia. Both of those events could have some impact on business activity but the underlying macro trends in Australia are positive. There has been something of a decline in the housing market but that is in some respects welcome because it means that the rapid increases in property prices which many analysts thought were unsustainable have indeed come to an end and as in many countries ensuring that there is enough excessively priced property is not just an economic issue but a political issue and one which is generating a lot of debate so that trend of itself is efficacious. And News Australia and the team led by Mike Miller is performing very well. EBITDA is growing, the digital transformation of the company is continuing apace and we're particularly optimistic about the potential for the business.
spk06: Thank you Craig. Aaron, we'll take our next question please.
spk08: Certainly and our next question comes from Brian Hahn with the Morningstar, your line is open.
spk02: Robert, hypothetically if you had strong buyer interest for Wall Street Journal is that a mass tip that you and the board would consider selling or is the journal an absolutely integral part of your digitisation strategy across the board?
spk07: Hypothetically, you shouldn't answer hypothetical questions but the Wall Street Journal not only is a powerful platform for us, the network effect that you have for example in the relationship between Realtor and the Wall Street Journal, the ability to cross promote for us increasingly to get sophisticated permissioned data on those platforms and right around to Harper Collins and the New York Post digital network. It is truly more than the sum of the parts and at the very centre of it is the Wall Street Journal.
spk06: Thank you. Aaron, we'll take our next question please.
spk08: At this time there are no additional questions. I'd like to turn the program back over to the presenters for any additional comments.
spk06: Great. Aaron, thank you very much. Thank you all for participating and have a great day and we'll talk to you soon. Take care.
spk08: Thank you for your participation. This does conclude today's program. You may disconnect at any time.
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