News Corp Benefits From A Solid Growth At Book Publishing And Digital Real Estate Operations

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News Corp (NASDAQ:NWSA) recently reported its Q2 fiscal 2015 earnings with 2% revenue growth and stable EBITDA of $328 million. Adjusted earnings were $0.26 per share as compared to $0.31 per share in the prior year quarter, partly due to a decline in the company’s U.K. operations. [1] The results came in on expected lines with continued declines in print media and strong growth at other segments. Book publishing continued to see solid growth amid the benefits from Harlequin acquisition. Digital real estate assets also benefited from its recent acquisition of Move Inc. While the company continues to see growth at book publishing and digital real estate, print advertising remains a concern. The environment for the print industry remains 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 in the near term.

We currently estimate revenues of around $8.82 billion for News Corp in 2015, with EPS of $0.61. We currently have a $18 price estimate for News Corp, which we will soon update to incorporate the recent quarterly earnings.

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See our complete analysis for News Corporation

Harlequin Boosts Book Publishing Operations

Book publishing revenues increased 20% to $469 million while EBITDA grew 13% to $77 million. The solid segment performance was primarily a result of the company’s recent acquisition of Harlequin, which contributed $80 million in the quarterly sales. The revenues from e-book sales rose 14% and accounted for 17% of overall consumer revenues for the quarter. [2] It must be noted that digital books have lower production and distribution costs than print books and this will help the company see continued growth in the long run. The company was quick to move to a digital platform and provides more than 35,000 e-book titles across devices such as Amazon Kindle and Apple’s iBook. The growth in digital book sales will boost the segment margins in the coming years due to the lower costs associated with digital publishing. Accordingly, we estimate segment revenues of  $1.59 billion for 2015 and an estimated EBITDA margin of around 11% will translate into EBITDA of $168 million, representing 16% of the company’s overall EBITDA in 2015. In the long run, we estimate the segment revenues to be north of $2 billion and EBITDA of over $280 million by the end of our forecast period.

Solid Growth At Digital Real Estate Segment

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. The segment revenues surged 50% to $154 million while EBITDA grew 4% to $57 million during the December quarter. While the top line growth can largely be attributed to the recent acquisition of Move Inc., the growth in EBITDA was offset by a $16 million one-time transaction cost related to the acquisition. [1] Going forward we expect this uptrend to continue given both the popularity of its real estate websites in Australia and the recent addition of the Move group of websites in the U.S. Moreover, the company is aggressively eyeing other investment opportunities in line with ts recent acquisition of Move Inc. and investments in SEEK and iProperty, which will further aid the revenue growth. We estimate the digital real estate revenues to grow $580 million and an estimated EBITDA margin of 49% will translate into EBITDA of over $280 million, representing close to 20% of the company wide EBITDA by the end of our forecast period.

Continued Declines At News And Information Services

News and information services revenues declined 6% to $1.52 billion, led by a 9% decline in advertising income. While the decline in advertising was across geographies, the one in the U.K. market was quite high at 16% in local currency. The company’s management said that the U.K. advertising market is volatile but they expect growth in digital advertising. [2] Looking at the segment EBITDA, it declined 15% to $216 million primarily due to declines in the U.K. operations.

While the company’s digital media assets are growing, they are not able to offset the declines seen in the print media. Moreover, the growth of the Internet gives users the access to free and abundant information online, thereby making print media less lucrative for advertisers. However, News Corp has a portfolio of digital assets and strong brands, such as The Wall Street Journal, which has been growing steadily for quite some time now and also saw a 2% advertising growth in the December quarter. Given these trends, we expect the segment revenues to continue to decline in the near term and stabilize in the long run driven by growth in digital sales. Moreover, the company is trying to reduce its reliance on advertising income, which will provide a stable growth outlook in the long run. Our segment revenue forecast currently stands around $6.30 billion and an estimated EBITDA margin of around 12% will translate into EBITDA of over $780 million, representing 50% of the company wide EBITDA by the  end of our forecast period.

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Notes:
  1. News Corp’s SEC Filings [] []
  2. News (NWSA) Q2 2015 Results – Earnings Call Transcript, Seeking Alpha, Feb 5, 2015 [] []