News Corp Q1 Fiscal 2015 Earnings Preview: Watchout For Advertising Trends In News & Information Services

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News Corporation (NASDAQ:NWSA) will report its fiscal Q1 2015 earnings on November 5th. While we expect continued growth in its digital real estate business, the weakness in print industry may lead to a further drop in news and information services. The company has suffered significant losses in the past few years, primarily due to the writedown of assets. The cash flows are still positive, but the challenge is to counter the secular decline in the publishing industry and revive sales. Looking at the fiscal 2014, News Corp’s revenues declined 4% to $8.57 billion. While the company’s other divisions, including book publishing, cable networks and digital real estate, all witnessed revenue growth, the core news and information services segment saw a revenue decline of 9% and segment EBITDA declined by more than 16%. [1] We believe this trend will continue in the near term and accordingly expect the company to post lower sales in news and information services and continued growth in other segments during the September quarter.

Earlier in September, the company agreed to acquire Move Inc. for $950 million. [2] Move Inc. operates the Move Network of real estate websites, which capture more than 35 million monthly visitors.  In fact, it is the third most trafficked website in the U.S. We believe this is a great move for the company, as it will allow News Corp to diversify its digital real estate business, which is primarily in Australia. We will be looking for further updates on this development during the company’s quarterly earnings call.

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See our complete analysis for News Corporation

Expect Continued Revenue Decline At News And Information Services

News And Information Service is an important segment for News Corp as it accounts for more than 40% of the company’s value, according to our estimates. The environment for print industry in particular is challenging. As Internet penetration continues to expand, users increasingly get access to free and abundant information online. This continuing trend could keep putting a downward pressure on circulation prices. Foreign currency fluctuations have further added to the woes in the recent past. It must be noted that the company has a significant presence in Australia and the strengthening of the U.S. dollar against the Australian dollar resulted in a revenue decrease of around $200 million for fiscal year 2014. We are eager to see how this segment trends in the near future given the current landscape of the print industry. We currently expect the revenues to continue to decline in the near term and stabilize in the long run driven by growth in digital sales. The company in its previous quarterly earnings call stated that revenue from non-advertising sources will increase significantly over the next five years. [3] This will provide stable growth outlook in the long run given the uneven trends in the advertising marketplace.

Positive Trends In Digital Real Estate

The company’s digital real estate business has been trending well over the past few years. The business stems from its 61.6% ownership of REA Group, which is a digital advertising business specializing in real estate services. It offers digital advertising solutions to help real estate agents sell or rent properties and win new listings. The company generates revenues from advertising. The segment revenues increased 18% to $408 million while EBITDA jumped 27% to $214 million for the fiscal year 2014, reflecting high EBITDA margins of over 50%. [1] Going forward we expect this uptrend to continue given the popularity of its real estate websites in Australia. Moreover, the company is aggressively eyeing more assets such as its investment in SEEK and iProperty, and now the acquisition of Move Inc., which will further aid the revenue growth.

We estimate revenues of around $8.8 billion for News Corp in 2014, with EPS of $0.51, which is in line with the market consensus of $0.45-$0.51, compiled by Thomson Reuters. We currently have a $18 price estimate for News Corp, which is more than 10% ahead of the current market price.

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Notes:
  1. News Corporation’s SEC Filings [] []
  2. News Corp To Acquire Move, Inc, News Corp’s Press Release, Sep 30, 2014 []
  3. News’ (NWSA) CEO Robert Thomson on Q4 2014 Results – Earnings Call Transcript, Seeking Alpha, Aug 7, 2014 []