News Corp Earnings Takeaways: Foreign Exchange Headwinds A Drag

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News Corp (NASDAQ:NWSA) announced its second quarter fiscal 2016 earnings on Thursday, February 4. As per our expectations, a decline was witnessed in all revenue streams, except for digital real estate, mainly due to foreign exchange (FX) headwinds. News and information services continued to struggle amidst a challenging environment for print media, falling 8% y-o-y in the December quarter. Further, low e-book sales curbed the growth in the book publishing segment and high programming costs led to a decline in revenues from cable network programming. As a result, total revenues in the quarter fell by 4% year on year (y-o-y) to $2.16 billion. ((News Corp reports second quarter earnings, News Corp Press Release, February 2016))

On the expense side, the company restricted its operating expenses to $1.2 billion, down 5% year on year (y-o-y). Despite continued fiscal discipline, losses in the top line caused the company-wide EBITDA margin to fall to 12.96% in the quarter, from 15.58% in the comparable year period.

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Our price estimate of News Corp’s stock is $18, significantly above the current market price.

See our complete analysis for News Corporation

Digital Real Estate- The Engine Of Growth

Digital real estate services is the fastest growing segment of the company, deriving revenues from its subsidiaries Move Inc. (acquired in November 2014) and REA Group. The segment saw strong progress in the quarter with growth of 35% y-o-y to $208 million, mainly driven by the inclusion of Move’s results. Move’s revenues increased 35% y-o-y to $87 million, due to 37% growth in average monthly unique users on its web, realtor.com, and mobile sites. On the other hand, at REA Group, revenues fell due to FX headwinds, despite greater residential listing depth product penetration. News Corp believes Move Inc. and REA Group to be the core pillars of its future profitability, and accordingly expects sustained growth in the segment going forward.

Continued Headwinds In News And Information Services

Advertising revenues declined 12% y-o-y in the quarter, primarily due to the weakness in print advertising in Australia, offset slightly by growth in digital ad revenues. Similarly, circulation revenues declined 5% y-o-y, due to negative foreign currency fluctuations and print volume declines. However, excluding foreign currency effects, circulation revenues actually increased 1% y-o-y. This can be accounted for by higher subscription pricing, selected cover price increases and over 30% growth in paid digital subscribers in the U.S. and Australia (resulting in a total of 268,000 subscribers). Subsequently, news and information services revenues declined 8% y-o-y to $1.4 billion in the December quarter. The company expects the March quarter for segment to remain challenging, although digital advertising revenues may be helped by its recent acquisitions such as Unruly. ((News Corp second quarter earnings transcript, Seeking Alpha, February 2016))

Cable Network Programming Suffers From FX Headwinds

Cable network programming revenues fell 5% y-o-y to $106 million, due to FX headwinds and decline in subscription revenues. Excluding the effect of FX fluctuations, revenues actually increased 10% y-o-y in the quarter.  This was a result of the 7% growth seen in advertising revenues owing to a higher market share and the acquisition of rights to the Rugby World Cup. However, higher programming rights and production costs related to the Rugby World Cup of $11 million drove the margins for the segment down. The company sees the acquisitions of long-term rights to National Rugby League and Rugby Union as a robust foundation for the expansion of the segment in the future.

Digital Sales A Drag On Book Publishing Revenues

Book publishing revenues were down 5% y-o-y to $446 million in Q2, fiscal 2016. Digital sales represented only 16% of the consumer revenues due to lower e-book sales (a trend seen across the industry), down from 19% in the prior year period. Further, despite higher volume of print sales, tough year-on-year comparisons contributed to lower revenues. The company expects the trend to continue in Q3 as News Corp faces still tough y-o-y comparisons.

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