Currency Headwinds Weigh Over News Corp’s FY Q3 2015 Earnings

News Corp (NASDAQ:NWSA) recently reported its Q3 fiscal 2015 earnings with revenues stable at $2.06 billion while EBITDA declined 7% to $163 million. ^[1] Adjusted earnings were $0.05 per share as compared to $0.11 per share in the prior year quarter, primarily due to unfavorable foreign currency rates. Book publishing continued to see solid growth amid the benefits from Harlequin acquisition. Also, News and Information Services continued its downtrend given the challenging environment. 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. We believe this trend will continue in the coming years and keep putting a downward pressure on circulation prices in the near term. Looking at the current quarter, the company expects currency headwinds to continue but also sees EBITDA growth led by lower costs at News U.K. ^[2]

We estimate revenues of about $8.86 billion for News Corp in 2015 with EPS of $0.36, which is below the market consensus of $0.50, compiled by Thomson Reuters. We currently have a $20 price estimate for News Corp, which we will soon update to incorporate the recent quarterly earnings.

See our complete analysis for News Corporation

Continued Growth At Book Publishing Segment

Book publishing revenues grew 14% to $402 million while EBITDA grew 6% to $56 million. The solid segment performance was primarily a result of the company’s last year acquisition of Harlequin, which contributed $73 million in the quarterly sales. The e-book sales declined 3% and accounted for 22% of overall consumer revenues for the quarter due to unfavorable comparison with Divergent series last year. It must be noted that the company sold only 2.5 million units of Divergent in the March quarter as compared to 8.5 million units sold in the prior year period. However, the company benefited from the success of Chris Kyle’s American Sniper in the March quarter this year. ^[2] We continue to believe that the company will see higher growth in digital book sales in the long run driven by the growth of e-book reading applications and devices such as Kindle and Nook. Price Waterhouse Coopers also claims that e-book sales will exceed print sales by 2018 (see – How Are News Corp’s Book Publishing Operations Trending?) ^[3]. It must be noted that digital books have lower production and distribution costs than print books and this will help the company see higher margins in the coming years. We currently estimate segment revenues of over $1.70 billion for 2015 and an estimated EBITDA margin of around 11% will translate into EBITDA of $185 million, representing 20% of the company’s overall EBITDA in 2015.

Continued Declines At News And Information Services

News and information services revenues declined 9% to $1.35 billion, led by a 12% decline in advertising income. While the decline in advertising was across geographies, the one in the U.K. market was high at 11% in local currency. ^[2] Looking at the segment EBITDA, it declined 23% to $113 million primarily due to lower advertising revenues and also due to unfavorable foreign currency rates. ^[1] 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. Even the company’s strong brands, such as The Wall Street Journal, are seeing lower advertising revenues (down 11% for the March 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. 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 billion and an estimated EBITDA margin of around 6% will translate into EBITDA of around $330 million, representing more than 35% of the company wide EBITDA in 2015.

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1. News Corp’s SEC Filings [↩] [↩]
2. News’ (NWSA) CEO Robert Thomson on Q3 2015 Results – Earnings Call Transcript, Seeking Alpha, May 5, 2015 [↩] [↩] [↩]
3. PwC Claims eBook Sales Will Exceed Print in 2018, Digital Reader, Nov 18, 2014 [↩]