News Corp Earnings Preview: Advertising Trends In Print Media And Digital Assets In Focus

News Corp (NASDAQ:NWSA) will report its fiscal Q2 2015 earnings on February 5th. (Fiscal years end with June.) While we expect continued growth in its digital real estate business, the weakness in print industry may lead to a further revenue drop in News and Information Services. However, the company will surely benefit from its recent acquisition of Harlequin book publishing business as well as Move Inc. Looking at the previous quarter, News Corp posted a 21% jump in EBITDA driven by the benefits from Harlequin book publishing business. 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 3% and segment EBITDA declined by more than 20%. ^[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 for the December quarter.

In a major development this week, the U.S. Department of Justice said that it won’t pursue charges over the phone-hacking scandal and it was closing the investigation against News Corp. ^[2] This comes in as a major relief to the company. This scandal has affected the company’s publishing business in the U.K. and its image worldwide. One of the reasons why the media giant split last year was to separate its TV and movie business from this scandal and redefine its image while keeping bad publicity to a separate unit. After the news broke out yesterday, the company’s stock price jumped close to 5% to $15.61 in trading.

We estimate revenues of around $8.83 billion for News Corp in 2015, with EPS of $0.61, which is slightly higher than the market consensus of $0.36-$0.60, 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.

See our complete analysis for News Corporation

Print Media Likely To See Continued Pressure From Lower Advertising

News and Information Services is an important segment for News Corp and it accounts for more than 40% of the company’s value, according to our estimates. The environment for the print industry in particular is challenging. As Internet penetration continues to expand, users increasingly get access to free and abundant information online. This has resulted in a decline in the company’s subscriber base. Lower readership has in turn led advertisers to spend less on print ads. This continuing trend could keep putting a downward pressure on circulation prices. Looking at the previous quarter, News and Information Services revenues declined 3% to $1.45 billion, led by a 7% decline in advertising income. The decline in advertising was across the geographies with a 5% drop in Australia and 6% in the U.K. Given the trends in the print industry, we expect the company to post lower revenues and profits for the December quarter. While we believe that the segment revenues will continue to decline in the near term, we expect them to stabilize in the long run driven by growth in digital sales as well as non-advertising income.

Digital Real Estate Will Drive Growth In The December Quarter

The company’s digital real estate business has been trending well over the past few quarters. News Corp offers digital advertising solutions to help real estate agents sell or rent properties and win new listings. The company generates revenues from advertising and the margins are usually high at around 50% for this segment. Looking at the previous fiscal, the segment revenues increased 18% to $408 million while EBITDA jumped 27% to $214 million. ^[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 acquisition of Move Inc., and investments in SEEK and iProperty, which will further aid the revenue growth. News Corp acquired Move Inc. for $950 million in 2014. The Move Network of real estate websites captures more than 35 million monthly visitors making it one of the most trafficked website in the U.S. This acquisition will help News Corp diversify into the U.S., a lucrative market for advertising space. Move Inc. generated revenues of $227 million in 2013 primarily from advertising. Benefits of Move acquisition will surely be visible on the company’s quarterly earnings.

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1. News Corp’s SEC Filings [↩] [↩]
2. News Corp probe dropped by US justice department, BBC News, Feb 3, 2015 [↩]